Kevin Kroskey's Money & Mind

Few words characterize today’s financial markets like uncertainty. When overseas economic issues can rob investors of months of gains and speeches by Federal Reserve officials cause markets to flip-flop unpredictably, investors are left wondering what they should do. In an attempt to make major market movements work for their portfolios rather than against, some investors attempt to time the market. Market timing is the strategy of trying to predict future market movements to time buying and selling decisions. When markets are rallying or pulling back, it can be very tempting to try to seek out the top to sell or the bottom to buy. The problem is that investors usually guess wrong, missing out on the best market days or months. The last few months has been volatile. The S&P 500 goes down -6.0% in August, another -2.5% in September, but bounces back +8.4%in October. If you hit the eject button at the end of September, you lost out! Missing out on the market’s top-performi...

If you don't already read Jason Zweig's regular column in the Wall Street Journal, you should. He is one of the few financial journalists worth reading. His recent article on the psychology of the recent market drop is rational and instructive. ==== Click here to read the article in it's entirety: http://blogs.wsj.com/moneybeat/2015/08/24/the-cruel-psychology-of-the-1000-point-drop/ See below for a snippet: Experiments have shown , for instance, that people believe cancer is riskier when they are told that it kills “1,286 out of 10,000 people” than when they hear that it kills “24.14 out of 100 people.” Hearing “1,286” immediately brings a large number of victims to mind, while “24.14” is simply a much smaller number. To notice that the first number is less than 13%, while the second is more than 24%, you have to focus on the denominators of the fractions and do some quick division. But your emotions will likely hijack your brain long before you get to that poi...

With all the recent shark attacks in the news, I was reminded of an article published on Bloomberg relating investment risk to the frequency of large predator kills. They are quite a rare occurrence, but we tend to perceive them and the associated risk as being much more prevalent. This misperception also has much to do with risks when it comes to investing. With shark attacks, Greece, Puerto Rico, etc. in the headlines take a few minutes and read the article linked below. Remember what risk truly and is not and focus on what you can control. http://www.bloombergview.com/articles/2014-05-21/what-kills-you-and-your-investments

It is helpful to think of a combination of asset classes--emerging markets, U.S. or international stocks, treasury or corporate bonds, cash, etc.--as a recipe . And think of the individual funds that you own as the ingredients being used in the recipe. Both matter a great deal. And both determine the net investment results from your portfolio and how the food you eat will taste.   Emerging markets as an asset class have been a better performer than either US or international developed markets in 2014. But over the prior three years Emerging Markets had fallen out of favor and an unsophisticated investor may have not had the patience to realize the increased expected returns.   In October 2013 I wrote Emerging Markets and Kenny Rogers' "The Gambler,"     "If anything, one should consider increasing their targeted allocation to emerging markets, precisely because they have had such a bumpy ride recently. After all, price and value are inversely re...

An important paper has recently released by the Social Security Administration called   Behavioral and Psychological Aspects of the Retirement Decision . It delves into some of the non-financial reasons why people choose to retire when they do. Following are some highlights from the paper. Many future retirees do not understand the interplay between claiming age and Social Security benefits.   Even when they understand the claiming rules, many people claim benefits when it is not economically advisable to do so, as m ore than half of retirees claim benefits at 62.  Retirees tend to   anchor   on ages that have some retirement significance.   Why do so many people claim to be "burnt out" at work when they turn 62? Why not 60 or 64 or 68? It's because 62 is the age of eligibility for Social Security benefits. But what if they were to anchor on age 70 instead? Might they push through the burnout, as they would if it occurred at 55 or 60 when retirement cle...

Walter Updegrave, in addition to being an award-winning journalist, speaker, author and senior editor of MONEY is a professional who truly understands the world of retail investing and communicates his thoughts in a manner meaningful to his readers. As an example, below is an excerpt from a recent   CNN Money release   based on a readers question “Should I hire a financial adviser to manage my retirement portfolio, and can I afford to?” “The answer depends largely on how comfortable you are going it alone -- and how good a job you think you could do overseeing your finances without help from a pro. Let's start with one key aspect of retirement planning: investing. As long as you're familiar with the concept of asset allocation and you're comfortable picking funds, you shouldn't have trouble building a diversified portfolio on your own. And you can get plenty of assistance short of hiring an adviser: These days most 401(k) plans provide tools to help you assess your in...

Below is a brief article from Weston Wellington of Dimensional Fund Advisors, reviewing the markets over the last year and concurrent headlines from the media. It always helps to keep things in perspective and not get caught up in the financial pornography that is put upon us. -Kevin Kroskey --------- For the twelve-month period ending May 31, 2011, equity investors around the world enjoyed the equivalent of blue skies and bright sunshine while the economic news was partly cloudy at best. Among forty-five developed and emerging-country stock markets tracked by MSCI, all but four had double-digit total returns (in US dollar terms), and twenty-six had returns of 30% or more. If someone had told us a year ago that global markets would stage such a broad-based rally, we would have been inclined to think that trends in employment, housing, and financial distress were about to take a pronounced turn for the better. It seems hard to argue they have done anything of the sort. ...

Limiting spending to interest or dividends received is a common idea that many retirees have about managing spending in retirement. This idea causes some retirees to reach for yield in both stock and bond investments. In an annual report for Berkshire Hathway, Warren Buffett wrote, "More money has been lost reaching for yield than at the point of a gun." Pursuing an interest-and-dividend-only strategy is sub-optimal for a multitude of reasons, man of which I'll be explaining in an upcoming article to be posted at the Money & Mind blog. Meanwhile, click on the video below to listen to Ken French of Dartmouth College answer the question whether retirees should limit their spending to interest and dividends.

It's that time of year when many of us are thinking about the New Year's resolutions we set for ourselves. This often means committing to improving one's lifestyle by losing weight or exercising more. Some investors could probably benefit from resolutions targeting their financial health as well. Just as many individuals endanger their well-being with bad habits, numerous investors suffer from ill-advised practices that are detrimental to their wealth. Perhaps a set of New Year's investment resolutions will lead to a more prosperous future. Everybody wants to be healthier, and many people want to be wealthier, but it's just not that easy. Most of us are creatures of habit and discover that making permanent changes in our behavior is surprisingly difficult. We need every possible mental crutch at our disposal to help us adhere to a new regimen; hence we establish mental road signs, such as New Year's resolutions, as behavioral aids. So, for those who find mak...

"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.) ...

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 ove...

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

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 ma...

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 ...