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Showing posts from 2009

More Mutual Funds 'Time' Market

Through my experience as a Certified Financial Planner(r) in counseling clients and in staying abreast of changes of the financial product companies, it has become quite evident time and again that it is a lot easier to sell consumers what they think they want rather than to educate them on what they need. From insurance carriers and financial sales people selling 'guaranteed products' at exorbitant costs to mutual fund companies seeding multiple new funds and then promoting the ones that do well while silently closing the unsuccessful funds before they receive their Morningstar ratings, consumers are preyed upon and have to side step a mine field of damaging advice and products if they're to be successful and reach their life's goals.

The Wall Street machine certainly isn't slowing down. Rather than educating consumers on market history, so they can learn why the negative returns from The Great Recession--while not pleasant nor frequent--are in fact a part of inve…

Why Smart People Make Dumb and Costly Mistakes With Money

"I can calculate the motion of heavenly bodies, but not the madness of people."

Sir Isaac Newton, Response to the 1720 collapse of the "South Sea Bubble"

Isaac Newton not only invented Calculus and discovered his Three Laws of Motion. Isaac Newton also lost a majority of his wealth in the South Sea Bubble, falling victim to behavioral mistakes investors make.  Research indicates that humans are not naturally wired for prudent, long-term investing. And if a genious like Isaac Newton falls victim, what are ordinary investors supposed to do?

In the video accessible through the link below Scott Bosworth of Dimensional Fund Advisors describes common forms of behavioral bias and discusses how these biases influence investment decision making. He also explains how knowledge and discipline can help investors control their instincts for a better investment outcome.

Click here to watch the video. (Approximate run time is 20 minutes.)


"Hell Week, One Year On" by Nick Murray

We recently observed the first anniversary of the most shocking and terrifying week in most of our financial lives: the economic cataclysm of September 15-19, 2008.

Even the greatest one-day stock market crash in history on October 19, 1987 did not shake us the way this Hell Week did, inasmuch as it was almost entirely contained in the equity market: the economy, the banking system, and the world at large, aided by a tsunami of liquidity from the Federal Reserve, rolled merrily along. The epicenter of the earthquake - at the corner of Broad and Wall Streets - turned out to be the whole earthquake.

And the terrorist atrocities of September 11, 2001, even as they forced us to confront a whole new global geopolitics - and our position in the world as the target of an unfathomable crypto-religious hatred - had, after the initial shock, no lasting economic effect.

But Hell Week 2008 shook the global financial system to its foundations. The previous week, the federal government had taken over …

I.O.U.S.A. Free Movie Showing During Financial Planning Week

In support of Financial Planning Week which runs from October 5-11, 2009, the Financial Planning Association of Northeastern Ohio is pleased to announce a public showing of the movie I.O.U.S.A. (http://www.iousathemovie.com/) at the Cedar Lee Theater in Cleveland Heights, OH. One of the missions of the FPA is to raise awareness about the the importance of personal financial planning and offer guidance in making financial decisions. As a Board Member of the association I support and encourage this pro bono event in our community.

Tuesday, October 6, 2009 at 7pm
Free Admission (with a suggested donation of $3 to go towards Cleveland Saves)
Cedar Lee Theater
2163 Lee Road
Cleveland Hts., Ohio 44118

Seating is limited, so please register at http://tinyurl.com/ydq99lh. (You must register to attend.)

Although the movie is free, there is a suggested donation which will go towards Cleveland Saves, a local non-profit that encourages individuals and families to save money so that they can build wealt…

The Deeper the Slump, the Zippier the Recovery

(Below is an excerpt from a Wall Street Journal article, written by James Grant--an esteemed market observer and usual pessimist--published on 9/19/09. In my opinion this article represents a minority voice in public economic comment today and should be heard.)

From Bear to Bull: James Grant argues the latest gloomy forecasts ignore an important lesson of history: The deeper the slump, the zippier the recovery.

Americans are blessedly out of practice at bearing up under economic adversity. Individuals take their knocks, always, as do companies and communities. But it has been a generation since a business cycle downturn exacted the collective pain that this one has done. Knocked for a loop, we forget a truism. With regard to the recession that precedes the recovery, worse is subsequently better. The deeper the slump, the zippier the recovery. To quote a dissenter from the forecasting consensus, Michael T. Darda, chief economist of MKM Partners, Greenwich, Conn.: "[T]he most importa…

Reasons for Optimism Shouldn't be Shunned

There was a good, short article in the Wall Street Journal this morning that I wanted to post. The article is entitled, "Reasons for Optimism Shouldn't be Shunned." Investors are emotional and find reasons to support the emotions they're feeling, ranging from overly pessimistic to overly optimistic. After 2008 most investors have been focusing on the negative and ignoring the positive.

"Even though stocks are up nearly 50% since early March, worries about valuations, the dollar, inflation and corporate profits permeate market chatter -- chatter so loud you can barely hear all the good news." Click here to read the entire article:

http://online.wsj.com/article/SB125287540315306843.html?mod=djemITP



Active vs. Passive: Man or the Market?

Many academics consider the active-vs.-passive debate settled. Yet, despite the strong evidence supporting a passive, index-like approach, many investors still assume that skillful active management can increase returns, net of costs. The basis for a prescription of a passive investment strategy rests on scientific inquiry in the field of finance rather than on anecdotal evidence or 'good-sounding' stories told by the active mangers, media, supposed gurus, or others spouting investment pornography.

The tests have been done and they are well documented. Unfortunately for many investors, the subjects of these tests are not lab rats, but real people with real money! Below are some common questions that can help clarify this debate and hopefully help you not to fall victim to the higher costs and subpar performance of active managers.

Q: If an active manager can gather information and gain insight or knowledge through research into a company, shouldn't he be able to beat the mar…

Did You Do as Well as Your Mutual Fund?

It's common practice to look at a fund's total return number for a snapshot of what performance to expect, but that won't give you the full picture. Morningstar studies have shown that investors' actual gains frequently pale in comparison to reported total return numbers. This phenomenon frequently plays out among funds that attract assets after streaks of hot performance, only to see some investors get skittish at the first signs of underperformance. After a moment's though, even a novice investor will realize that this behavior is just the opposite of the mantra -- buy low and sell high.

This practice can be more broadly attributed to bad behavior and lack of a plan or philosophy when it comes to investing. Investors are human and humans are emotional. As much as the logician in me would like to believe my left brain is working to drive my decision making, logic comes in after emotions are experienced to provide context for how we are feeling and not the other way…

Bangladesh Butter Production Predicts U.S. Stock Returns

After reading the title of this post, my hope is that a look of disbelief is cast on your face. Of course butter production in Bangladesh has nothing to do with prediction of US stock market returns. However, through data mining all sorts of 'relationships' can be demonstrated. Many mutual funds, ETFs, and trading strategies are built upon these data mining strategies--most often to the harm of investors that utilize them.

As Jason Zweig describes in a recent article in the Wall Street Journal, entitled Data Mining Isn't a Good Bet For Stock-Market Predictions, "The stock market generates such vast quantities of information that, if you plow through enough of it for long enough, you can always find some relationship that appears to generate spectacular returns -- by coincidence alone. This sham is known as data mining."

I recall in from my business statistics course in grad school, how I was able to show that ice cream consumption was correlated to the murder rate-…

Bond Investors Misled by Wall Street Journal Article

In an article published today in the Wall Street Journal, entitled "The New Bond Equation," the author attempts to educate readers about the potential risks involved in investing in bond mutual funds, given the current economic environment. He writes:

"As the financial crisis heads into its third year, investors in bond funds are facing some difficult choices. Investors usually turn to these funds for safety. But bond funds are facing a host of pressures that are driving down returns, raising long-term risk—and making it tougher to settle on the right investment strategy."
While I agree with the author's statement above, he makes some statements that mislead bond investors. (Click here to read the full article.) For example, he writes:

"....they’re buying vehicles that invest in intermediate-maturity bonds. These funds also typically hold a mix of government, mortgage and investment-grade corporate bonds, which spreads risk around. Even cautious intermediate-…

Are We All Socialists Now: Government Intervention and Stock Market Returns

As a recent Newsweek cover asked, "Are We All Socialists Now?" And if so, should U.S. equity investors be alarmed by the prospect of greater government intervention in the economy? Historical data looking at this very question may be surprising to you.

Click the link below to watch a short 6 minute video, which provides some objective comparisons of stock market returns from the more free-market system in the U.S. compared to the returns from more interventionist governments from around the world. The evidence suggests that government intervention is just one factor among many affecting stock returns, and that an above-average degree of intervention is not necessarily associated with below-average returns.

https://admin.acrobat.com/_a772887163/governmentinterventionandstockreturns/

To Your Prosperity ~ Kevin Kroskey

Last Week Was Not One To Miss

Last week the Dow rose 7.3% last week amid earnings reports from many companies, as reported in the Wall Street Journal (http://online.wsj.com/article/SB124782681174757379.html). For most companies, it's not like the reports were necessarily good. It was that the news was not as bad as expected. This rapid rise in the market occurred despite poor economic news, including rising unemployment now predicted to go north of 10%.

To many investors, this seems counter-intuitive: poor economic news and declining earnings reports compared to the same time last year yet the market goes up markedly. How come? It's quite simple actually. The market looks forward and reacts to new and unknowable information. So even though the news was bad, much of it was not as bad as expected. Thus the new information positively changed market expectations and prices adjusted upward.

Unless you can predict the future, as investors we must stay invested through good times and bad to ensure we experience the…

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If any reader takes action or makes decisions based solely on the information on this blog without prior consultation with a qualified, licensed professional, the reader does so at his or her own risk and agrees that Kevin Kroskey and True Wealth Design shall have no liability resulting from such unilateral action or decisions by the reader.

The information posted on this blog is believed to be accurate and truthful. Nevertheless…