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Jan 12, 201612:08 PMFinancial Perspectives

with Michael Dubis, CFP

Don’t make these financial mistakes in 2016

(page 1 of 2)

Market volatility has certainly returned. If Thursday’s close is any indication, most global markets are likely entering a bear market following market peaks in late-2015.

With all of this going on, I continue to see, read, or hear about the same mistakes being made by investors in an attempt to either avoid losses or seek gains. Here are five mistakes I’d suggest you avoid:

  1. Listening to prognosticators. No one knows with certainty anything about the future. The ones who occasionally make the correct call are usually one-trick ponies and you won’t likely know them in advance; the ones who don’t will cost you a lot of money. Focus on what you can know or do: save, invest prudently, control spending, and maintain optimal insurance. If you do these four things for life you’ll likely do really well. If you lead your life following talking heads and prognosticators, well, good luck.
  2. Thinking “the market” is the S&P 500 or what you see on CNBC. The U.S. market cap is approximately 50% to 60% of the world market cap. That number fluctuates yearly but overall the U.S. is roughly only half the world’s equity market cap. The S&P 500 is only one component of the U.S. market and is also primarily large cap stocks, while there are thousands of mid- and small-cap companies worldwide. The market place is also made up of bonds and real estate, both equal to if not larger in value than stocks. Anchoring your investment experience and benchmarking performance to what’s said on TV in the  belief that it’s “the market,” will lead you to making very poor decisions with your money and likely leaving you under diversified, as well.
  3. Seeking out the perfect investment strategy. I commonly read or hear about how one money manager offers a superior strategy to another, or why one way of investing is the only way to invest. There are certainly superior strategies compared to chasing performance, paying high expenses and fees, market timing, or simply working with shysters, but in the world of prudent investing, there are multiple ways to invest one’s money, many of them very reasonable. Remember, no single strategy is always going to work all of the time. For example:
    • Buy and hold is awesome in bull markets and historically offers the best very long-term return, but it doesn’t consider risk management and can be very painful when markets take a rapid turn (like we’re seeing now).
    • “Strategic rebalancing” is wonderful when markets are volatile because it also helps manage risk, but when return is on a tear you’ll feel like a fool when you keep selling stocks to buy bonds.
    • “Indexing” is absolutely the leader in keeping costs low and usually outperforms active managers, but if a bubble shows up indexing can get absolutely clobbered due to its very nature of market-weighted valuations.
    • “Active management” (the reputable, lower-cost ones primarily) can often diversify funds, spread out risk exposures, and maybe even limit downside risks during severe bear markets in a way that indexing can’t.  However, it requires a very advanced appreciation of their approach and a long holding period with hope it works, all while you might get annoyed by underperformance in a bull market, especially if costs are high.
    • “Value-investing,” like Warren Buffett, or buying “cheap relative” companies has a very long-term positive record of performance, but that outperformance has been very absent for the last few years. In fact, Buffett had an absolutely horrible relative year in 2015. He was down more than 11% last year. Russell 1000 Value as an asset class was down 7.5%. Does this mean this will continue? Did the benefits of value disappear? Unlikely. Value has ample evidence supporting it over very long periods of time and Buffett has an amazing record. But I won’t be surprised to see folks give up on its long-term history given short-term results.
    • “Income investing,” or basically buying investment for interest or dividends income, is easier for some investors to appreciate, especially in retirement. It works well if you truly can live on that income and appreciate the risks as yields shift or especially when many investors are all competing for the same yield and markets inflate like we saw last year. Due to the concentrated exposure of the portfolio, when they become overvalued or out of favor they come with the same risk exposures as anything else — perhaps even more.

All of these strategies and many others are reasonable, they just don’t work all of the time. They can’t. If they did, they would, by the very nature of the markets, get bid up in pricing so high that the value of the strategy disappeared.

The key here is to make sure the strategy matches your goals, risk tolerance, and, most importantly, your commitment. Bailing on it at the wrong time can throw years, if not decades, of planning out the window. If you don’t know what to do with a strategy, here’s a simple approach: diversify not just your portfolio but your investment strategies, as well. I personally like this idea. Most importantly, be sure you’re comfortable with it and can commit to it before you execute it.

(Continued)

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About This Blog

It is an understatement to say the world has experienced a radical shift in capital markets. There are more layers of information and opinions on the direction of the world than we've seen in decades. The internet and the media do not always make it easier, but Michael Dubis' contribution through IB blogs will help you sift through the noise and give you some perspective. You can find his company online.

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