August 18, 2010

Patience (Investing)

It never was my thinking that made the big money for me.  It was always my sitting.  Got that?  My sitting tight! -Edwin Lefevre

This blunt warning was issued in Lefevre's 1923 fictional memoir, and treated by many financial advisers like the Bible.  Some 77 years later, behavioral finance professors Terrance Odean and Brad Barber's research into transactions by some 66,000 households between 1991 and 1996 found that those who traded least earned seven percentage points a year more than the most frequent traders.  Fast forward 10 more years and here we are, nothing has changed except that costs to own the market via an index are even more cost effective!
The moral: Once you arrange your assets into your ideal allocation, don't tinker.  Rebalance once a year to keep your mix on track, but otherwise, sit tight.

August 16, 2010

A Lot Of Retirement Is Luck

As a former stockbroker / financial planner, I hate to admit it but a lot of retirement is luck.  Saving for retirement is extremely important BUT planning is not. 

You can easily see what I mean.  Imagine two people with basically the same incomes (adjusted for inflation) and one person retires in 1980 and parks the bulk of their retirement money in safe CD's paying 15%!  Now that is good timing but is really just plain luck, not planning.

Imagine a second guy who retired just a few years ago, in 2008, ouch, first off, he likely lost some of his retirement money in his 401k or IRA and then had the unfortunate timing to choose between a stock market that is pretty darn scary or a CD or other fixed income paying virtually nothing.  This is also luck, bad luck, but again, has nothing to do with planning.

The point is that while planning is fine idea and looks good on paper, its really a useless exercise with little value.  Financial planning is propagated by the investerati to keep your assets under their control. 

A better idea is to be fiscally prudent (buy what you can afford), save what you can when you can (set a goal of 10%-15%), don't stress too much about retirement and when it comes time to retire, then and only then can you truly plan.

Planning when retired (or within a year at most) is infinitely more accurate, you will know what assets you have, what liabilities you have and can adjust your lifestyle to match, its that simple.  In my book, How the Investment Business Really Works, I offer a worksheet in the back of the book that will walk you through the simple steps to what I call Realistic Retirement.

August 6, 2010

Google or Wikipedia Index Funds

If you were to google (search) for index funds, you will find a great number of answers.  You will find some great companies offering what wasn't available just 40 years ago, an index fund. 

If you search wikipedia for index fund, you will get a great explanation and a wonderful history lesson.  It was only 1975 when John Bogle 'invented' and marketed the index fund to the public.  Most thought he was crazy, why would investors be happy with 'average' returns.  As it turns out, Bogle was crazy like a fox and now, some 35 years, investors are finally wising up to the fact that index funds routinely beat most mutual funds and certainly all stockbrokers and financial advisors.

The reason for the popularity of index funds is simple; ease of use and better performance.  Add to that there is no conflict of interest as there can be utilizing a stockbroker or that you dont get caught up wasting time trying to chase the next best mutual fund, its easy to see.