One of the most important things you can do as an investor is keep your risks under control, and this is one of the most powerful lessons we teach at Merriman.
Our work has lots of fans. Allan Roth, a financial planner and author who teaches behavioral finance at the University of Denver, recently drew on some of our work to make the case that many investors are taking more risk than they realize. You can read his blog post on the topic at CBSMoneyWatch.com.
Now a study has been done by a professor at Kansas State University on this very topic, and an article about the study appeared in The New York Times this past weekend. As you read it, much can be learned from figuring out which group you fit into. It’s also interesting to think about which group your parents fit into and how their emotions around money may have affected you.
Allan Roth, blogger for The Irrational Investor on CBS MoneyWatch.com quotes Merriman data in this post on portfolio risk.
It was not that long ago when the equity markets were down over 50%, buy-and-hold investing had been declared dead, and many investors had little faith that the markets would recover during their lifetime. Two years later the equity markets have risen significantly. Many investors may not understand why as the recovery has occurred during a period of soaring deficits, major bank failures, increased tensions in the Middle East, rising prices for oil and gold, and uncertainty over the financial stability of the European Union.
This article by David Callaway offers lessons that many investors have learned during this most recent downturn: The market has always recovered without the ability to see nor predict the turning point until after the fact. Buy-and-hold investment strategies are not dead, and investors who stayed the course through thick and thin did quite well. Diversification works, and diversified portfolios have helped to capture the best of market movements. Quite possibly the most important lesson we can all learn is that as the daily noise of the news grows louder and louder, often times the best thing we can do is tune it out.
I am a buy and hold investor, but two recent lectures by Niall Ferguson, a Harvard Economic-Historian, make a strong case for the impending economic collapse of the United States. He predicts default and/or rampant inflation and suggests re-allocating one’s portfolio to a mixture of gold and foreign investments. I can already hear you saying “no, this time won’t be different, America will recover”, but I suppose I just wanted to hear it straight from the source. Any words of wisdom would be most appreciated.
At any given time, it is not difficult to find somebody professing to know the short term future of the economy or the capital markets. Quite often these people are highly regarded professionals armed with plenty of data to support their claims. And quite often they are wrong. History is replete with examples of how investors made wholesale changes in their portfolios based on excessively optimistic or pessimistic predictions, only to regret it deeply after the opposite occurred.
We believe that the future is fundamentally unknowable, and thus cannot be predicted with any precision. We believe investors could use their time and energy and brainpower much more effectively by controlling what they can control instead of trying to predict what cannot be predicted. We do this for our clients and with our clients by maintaining portfolios that are designed to address a wide range of economic and market climates, including inflation.
I am retired and have my IRA invested with a conservative 40% equity allocation in the Vanguard equity funds you recommend. For the fixed-income part of my portfolio, I’m using the four funds you suggest for monthly income. This is because I plan to take out the income next year, and I want to build up that part of my portfolio with higher-yielding funds. Am I making a mistake doing this?
Unless you have an above-average ability and willingness to accept price volatility in your portfolio, I think you could be making a mistake. Your overall allocation and the wording of your question suggest that you see yourself as cautious. So it is important to understand that these two bond allocations are quite different.
In general, we build our portfolios to take risks on the equity side, where we believe risk is more likely to be rewarded, and avoid as much credit risk as possible on the fixed-income side. Accordingly, the fixed-income part of our Vanguard Tax-Deferred Portfolio is made up exclusively of U.S. Treasury and agency securities in order to stabilize the overall portfolio and mitigate the effect of falling equity prices. (more…)
With the high volatility in the stock market over the past year, emotions have been running at an all-time high for many investors. Staying on track has become harder than ever.
Although the overall stock market has recovered some of its lost ground this spring, many people are still very spooked by stocks. Unfortunately, that trepidation can lead to decisions that investors may later regret.
Long-term investors have two basic jobs: managing their investments and managing their emotions. You can hire somebody to manage your money — and we think you should. But only you can manage your emotions.
This is important because if emotions get out of control, they can undercut even the best money-management practices. (more…)
Many investors seem to think the past 10 years were a waste. Early in 2008 the Wall Street Journal declared the years since 2000 “the lost decade.” That, of course, is one possible interpretation of the market’s behavior since it peaked in 2000, stumbled through a severe bear market for about three years, roared back to recovery and then fell into its current slump late in 2007.
A client referred to the previous 10 years and said to me: “We really didn’t make as much as we expected, did we?” It was more a statement than a question. And it made me curious to know the facts.
What I found didn’t surprise me a great deal. But I think it might surprise many people. (more…)
Our resources
I’ve always been fascinated by people’s emotions around money. I believe emotions are often the root cause of some of the most devastating financial mistakes that people make. Here at Merriman, we not only help our clients invest wisely, we also help them avoid these kinds of mistakes.
