AFK Investor Coach

Diverisfication??

2009-01-27T14:07:00.003-06:00

Readers of this email know that I recommend investors own equities, diverisfy and rebalance. But what does diverisfy mean? Does it mean owning lots of stuff? What stuff should we own? How much should we own? Many of us are lead to believe if we own a bunch of different mutual funds we are diversified. In most cases this is not true. The typical broker will sell you different mutual funds with different managers, however the funds are typically in very few asset classes. The broker will find the best performing asset class and sell various managers to the investor. In this case the broker is not recommending the proper course of action, they are using the product that's the easiest to sell. It takes courage to recommend a strategy which includes underperforming asset classes. It must be done because it is the right thing to do. No one can predict the future, because something worked in the past does not mean it will work in the future. However, it is easier to sell. We need professional guidance, especially in times like these, extraordinary times. We do not need professional salespeople. It will take our faith in the free market system to overcome this financial crisis. We need to stay invested in companies around the world, in order to bring a sense of normal. Whatever normal will be, no one knows.

Investment Policy Statement

2009-01-07T13:40:00.008-06:00

The retirement plan industry has been using the investment policy statement as guide for investment decisions. This statement lays out what should be done to the asset allocation as markets change. Unfortunately we are experiencing historic volatility in our investments. The investment policy statement reminds us of our long term goals and how to best accomplish these goals. Everyone should have an investment polcy statement to guide them thru these historic times. All my current clients have an investment policy statement in place. Every successful endeavor has a plan to follow, McDonalds has one way to run each restraunt, if they allowed each franchise owner to do as they please. How could they advertise? What could customers expect when they visit numerous locations? Don't forget, the process is the solution! Without clear guidance our emotions would take over and we would panic during trying times. Stay invested....diverisfy....rebalance.

Who Knows?

2008-12-16T13:36:00.004-06:00

This week has been highlighted by the confession of Bernard Madoff of Madoff Investments for his $50 billion "ponzi" scheme. Mr Madoff started his firm in New York in 1960, initially it was a market makier for Wall Street, broker/dealer. Subsequently, Mr Madoff began managing money for individuals and institutions. He is a past president of NASDAQ and a respected professional on Wall Street. His success was unprecendented, he promised as much as a 20% return. His performance was positive until he confessed this week. Many sophisticated investors and institutions invested enormous sums of money. He did not hide his strategies, using equities and options. This is where it gets strange based on his strategy and based on the published volume of options he could not have traded the amount of money he purported to have under management. It would be impossible. The question becomes how could some of the most prominent banks in the WORLD and many very successful and sophistcated people blindly invest with Mr Madoff? What would possess them to believe the results without proper due diligence? I believe it is because they wanted to believe because they were 'rich' they should earn above average returns with little or no risk. They were wrong. As I have said because these are Free markets no one can consistently beat the market, no one knows the future. The most prudent way to invest is to own equities, have a long term focus, diversify and rebalance. Any other method is in essence gambling and speculating with your money.

Enough

2008-12-10T10:23:00.003-06:00

The press has kept us informed on what is happening to our economy and our lives. Or have they? We are being told that the way out of this financial crisis is to borrow money. The federal governement wants us to believe that we should keep on buying even if we have to borrow money to do it. But isn't this approach the reason we have a crisis right now. Banks were encouraged to borrow money to home buyers, even if they did not qualify. I believe most banks are responsible and actually wanted to be paid back for the loans. Everyone believed real estate values could not go down, well real estate values can go down when their is no one left to buy. Wall Street took on more risk than any rational person would, risking everything. They were wrong. It is true we get out of a recession by spending money, but not by borrowing money to spend. Perhaps a new strategy should be if you want something save your money until you can buy it. As a guide I have a book titled "Don't Buy Stuff You Can't Afford" its a one page book and very simple. The basic premise is work and sacrifice is the road to success not speculation and credit. We have had a money party and now we have a money hang over. We must get back to saving...stay invested...Diversify...Rebalance.

Best and Brightest

2008-12-09T13:01:00.003-06:00

The historic financial crisis we are now experiencing actually has some positive elements, one of which is the best and the brightest leaving 'Wall Street'. The best talent migrates to those fields offering the most reognition and highest pay. As a result of the meteoric pay in the financial industry, an entire generation of the best and the brightest young people seeking careers as financial engineers. There are already signs that the return to reality on pay levels is leading some of that talent towards careers in science, medicine, real engineers, research, manufacturing and the list goes on. Their drive and abilities are going to be put to much better use. This will result in improving lives through improved technologies, health care and increased productivity, which in turn will result in improved profitability and efficiencies. In the long run, I believe, the world will be much better off. The free markets will always adjust to changes. As we all know the only constant is that things will change. Which is why it is futile to attempt stock picking and market timing. To succeed we must invest...diversify...rebalance and stay disciplined.

Words of Wisdom

2008-11-21T14:28:00.007-06:00

These are extraordinary times, we have not experienced a down period such as this for most of our lifetimes. We are all concerned about the future, the unknown. There is no one who can predict the future consistently. It can be best said by one of the best, Warren Buffet in his October 17, 2008 New York Times opinion piece: Over the long term the stock market news will be good. In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts: the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president, Yet the Dow rose from 66 to 11,497. You might think it would have been impossible for an investor to lose money during a century marked by such an extraordinary gain. But some investors did. The hapless ones bought stocks only when they felt comfort in doing so and proceeded to sell when the headlines made them queasy. Good advice from one of the most successful..stay invested..diversify..rebalance.

Free Markets!!

2008-11-19T14:10:00.002-06:00

There have been many opinions on what to do with the automakers. Should we save them? Can we save them? No one really knows for sure. The business model utilized by the automakers is antiquated and inefficient. Would $25 billion save them? I have my doubts. The pain of allowing the automakers to fail would be hard, but attempting to save them might just delay the inevitable and cost the taxpayers more money for no return. Free markets demand that only well managed and efficient companies should survive. However the ripple effect would be deep and far reaching. The debate will continue. Should poorly managed companies be saved because they are BIG? Is the current management team capable and or willing to make the necessary changes? I do know that free markets work in the long run. The market rewards the companies with efficient processes and with the ability to remain flexible. We are investors not market timers or predictors. We have developed a scientific portfolio and investment policy statement. We must not allow these events to alter our ultimate goal. Stay invested...diversify...rebalance.

Fee Disclosure in your 401k Plan

2008-11-17T12:03:00.003-06:00

Brokers and 401(k) providers often claim to sell inexpensive 401(k) plans, sometimes even promising to operate plans for free. Here’s how they do it: Providers offset up-front discounts by making employees select from investments with very expensive fees. While an investment with 1.4% fees might not sound like much, a mere 1% increase in fees can decrease the value of a $100,000 investment by $66,254 over 20 years, assuming an annual return of 7%. Unlike administrative fees, investment fees are not directly billed. Instead they are subtracted from individuals’ account balances each reporting period, reducing individual returns, often without knowledge of investors. These fees are not one-time charges, but are deducted from individuals’ accounts for as long as they participate in the plan. And since investment fees grow as individual accounts balances grow, those who save the most are penalized the harshest. Plan providers rarely discuss investment fees. In fact, by law they are only required to disclose investment fees during enrollment, after employers have purchased the plan, making it almost impossible for participants and employers to effectively comparison shop. This all will be changing very soon, as the regulators will require full fee disclosure. The best plan of action is to have an independent analysis done on your plan.

The System

2008-11-11T10:51:00.003-06:00

There has been a great amount of discussion and opinions on the market conditions we are dealing with. I recently read an article that said Modern Portfolio Theory no longer works, market timing is the way to go. I will admit that no strategy always works, however going from one strategy to another and trying to out guess the market will inevitably lead to failure. The different opinions out there today are trying to work on the investors emotions, that someone else has the 'answer'! No one can consistently predict the future, by remaining disciplined to a proven strategy the investor will succeed in the long run. Financial institutions such as Merrill Lynch and Fidelity have hundreds of money managers, stock pickers, on staff because they know a few will get lucky and pick the right stocks or strategy, they then promote these lucky pickers or strategists. The result is the investor moving their money to the lucky pickers or strategists, which makes more money for the financial institutions. These institutions criticize strategies such as Modern Portfolio Theory because they make less money on trading. I encourage you not to fall victim to this hype stay disciplined to a proven strategy. In the long run you will succeed.

Finally

2008-11-04T12:36:00.003-06:00

I just returned from doing my civic duty. No need to call me with a recorded message for a last minute plea to vote for your candidate. I've already voted. So please stop calling me. Well almost over and everyone is wondering how the outcome will affect the markets. No one really knows for sure. The Democrats say the market performs better while they are in office. The Republicans say Wall Street prefers a Republican in office, which isn't really a good argument this year. I do know we are going through some very anxious times. Many plans have been derailed over the last three months. No one said it was going to be easy. Although this crisis seems the worst ever right now, however this is not the first time nor will it be the last. We must remain diligent in maintaining our focus and follow our investment policy statement no matter who is elected. We have a mathematically and scientifically designed portfolio, with our own customized level of risk. Successful investing is not about guessing where the market will go or which asset classes will out perform, its about having a plan and following that plan. Soon, I hope, we will have new leaders in Washington. Only time will tell what will develop.

Stay Invested and Win.

2008-10-28T14:01:00.006-05:00

As I write this the DJIA is up nearly 500 points. Where will it close? I have no idea. No one does. No one can predict the future, if they did why would they tell us. We are living through a historic time, Wall Street will be changed forever, General Motors is looking to merge with Chrysler, Consumer Confidence is at a low. The list goes on and on. Each time there is a crisis, this is not the first, there are different reasons for the crisis. As investors we must stay true to our plan. Stay globally diverisified, only 45% of the world's capitalization is in the U.S., rebalance and if possible keep buying/saving. These markets will recover, when I don't know. Will it be the U.S. market leading, intermnational markets or emerging markets? Is the bull market in commodities over? Who knows. When will the real estate market recover? Is the bear market in real estate over? All these questions are really unanswerable by any individual. However, there are those that will proclaim they saw it coming. If enough people are predicting someone will be right. The problem is we don't know who will be right and when until its all over. These markets will recover...stay invested...stay globally diversified...rebalance.

Oracle of Omaha

2008-10-21T12:52:00.002-05:00

As you might have guessed I am a big fan of Warren Buffet. Although I do not believe anyone can predict the future, Mr. Buffet's advice is well worth following. In a recent interview he mentioned his number one investing rule, "be fearful when others are greedy and greedy when others are fearful". He went on to say in the interview that people who are congratulating themselves for moving all their money into "cash", ie, CD's treasurey bills, money markets, will learn to regret that decision. Mr. Buffet feels "cash" will become the worst performing asset class going forward. We are in very trying times, with numerous opinions on what to do. Someone will be right in the short run, however, there is little chance that the same person will be right more than once. The difference is Mr. Buffet's strategy has not changed, he does not market time by getting in the market at the right time and get out of the market at the right time. He has a defined strategy that he follows no matter what the market conditions. He is well diversified and disciplined in his approach. There are times when his portfolio is lagging the general market, he remains focused, diversified, disciplined and invested.

Congratulations!

2008-10-14T13:28:00.006-05:00

Congratulations to all those that did not panic. Free markets work in the long run and you will be rewarded. It took courage to remain vigilant and stay invested. Courage is not the opposite of fear, courage is doing the right thing when it needs to be done. Remember Wall Street, whats left of it, benefits whenever investors buy and sell. When your portfolio is designed in a mathematical and scientific manner, using Modern Portfolio Theory you have a plan and you will reap the benefits if you follow that plan. No business became successful without a plan, unless it was plain lucky. Don't rely on luck with your investments. Adam Smith wrote "The Wealth of Nations" in 1776 and it remains the foundation of our free markets, just like the Constitution remains the foundation of our society. No one can predict the future. Stay diverisified...rebalance...stay invested in the free markets!!

Should I Wait Until This Is All Over?

2008-10-07T13:49:00.003-05:00

Ideally, we should all just time the market cycles and only buy when the market is low and sell when the market is high. Unfortunately, few, if any investors are able to do this with any consistency. We tend to make our investment decisions based on recent past events and how we feel about those events. If the market has done well lately, we wish, we are comfortable buying stocks. If the market has done poorly, however, we avoid them. Unfortunately, this is the exact opposite of what we should do if our goal is to maximize our long term return. Once we feel "comfortable" with the market, we have usually already passed up large potential gains. The stock market is forward looking and usually starts trending upwards between 6 to 9 months ahead of the economy actually recovering from a down cycle. Remember, as I said last week Warren Buffet is a buyer and NOT a seller. There is an unholy alliance between the media and the large financial institutions to convince the investing public to continue trading by spreading fear and panic. The large financial institutions make money when you trade in and out, making money on every trade. The media encourages sensationalism because it sells advertising. Remain invested, diverisfy, rebalance and believe that America and the capital markets will recover. We as a country have been thru much worse and we recovered and became stronger.

Who Wins.

2008-09-30T12:18:00.002-05:00

Panic has set in. Congress has decided not to bail out the financial institutions, while I totally agree that this is what should happen. Free enterprise rewards well managed companies and punishes poorly managed enterprises. To intervene in the system is a form of socialism. However,in this case the entire American public would suffer for the ills of a few. I believe Congress will eventually do the sensible thing and install some sort of bail out. Those responsible must be held accountable. We as investors must NOT panic in times like these. All successful investors have developed a plan and follow it, particularly in down markets. We have been through numerous ordeals like this in the past and the American people have prevailed each time. This time will be no different. Investors who stay the course will be rewarded in the long term. When investors begin selling out and then buying back in at a later time actually empowers Wall Street. Wall Street makes money on every trade, whether its selling or buying. They have actually convinced the investing public that trading in and out is the way to success. This could not be further from the truth. Believe in yourself, remain disciplined and trust the free enterprise system. Truly successful investors are buying now. Case in point, Warren Buffets $5 billion investment in Goldman Sachs. Mr Buffest has a system and a plan, which he diligently adheres to. One example is 1999 when the tech stocks were going thru the roof, earning 70, 80, 100% and more Mr Buffets investments lost 15%. However, in the long run his strategy has been successful. Don't Panic...stay diversified...stay invested. Don't empower Wall Street.

"Diversification Is Your Buddy!"

2008-09-23T13:37:00.004-05:00

Given the events of the past few months, many investors are considering moving their money out of the stock market. Since no one can predict the future, this is a huge mistake. You must decide if you are a gambler/speculator or an investor. Gamblers believe they can out guess the market and avoid all losses. The gamblers have proven numerous times to be wrong in the long run. One may get 'lucky' but no one can consistently market time. In markets like these diversification is your buddy. Proper diversification spreads risk across various asset classes with varying return characteristics or dissimilar price movement. Simply said: they don't do the same thing at the same time. Most investors are narrowly diversified into top performing funds or classes of the last five to ten years. They often feel diversified but aren't. To be diversified means including classes or types of funds in your portfolio that did poorly over the last five to ten years. If you do this, your portfolio will look and perform very differently from your neighbors' or friends'. Those of you which are my clients own portfolios which are professionally diversified and rebalanced much like the large pension funds. Over time these porfolios will help you successfully accomplish your investment goals.

Comparison to Others.

2008-09-23T13:25:00.004-05:00

Comparison to others is at the root of out discontent. Psychologists Kahnman and Tversky showed that more people would prefer to make $70,000 per year when others were making $60,000 than to amke $80,000, when others were making $90,000. There will always be "others" with more assets, money, or larger portfolios. We are doomed to disappointment because comparison destroys the joy of having and using what we already have. Most people would agree to make or have less as long as others were even poorer. Resist the impluse to compare yourself to your neighbor.

What's Happening?

2008-09-17T13:13:00.003-05:00

The recent downturn in the markets motivated me to talk about what is happening today. The fallout in the banking industry, Lehman Brothers declaring bankruptcy, Merril Lynch selling itself to survive and the AIG bailout are examples of our free enterprise system working. Thats right the system works. When companies such as these are poorly managed, take unnecessary and excessive risks, should go out of business. As an example Merril Lynch is on its third CEO this decade alone. This is an indication that there is no clear leadership. Companies such as this should not survive. However we as investors must not panic in times like these. We must remain disciplined and focused on the future. Ten years from now this will only be a 'blip'. A great example of investors behaving in inprudent ways, is Peter Lynch and the Fidelity Magellan Fund. Mr. Lynch managed the fund from 1977 to 1990 and realized an average annual return of 29%. Mr. Lynch himself said most people who invested in his fund lost money. Because they bought when times were good and sold at the first sign of a downturn. Successful investors develop an investment policy statement and they stick to it. They know market timing does not work. If you have such a strategy read it now and follow your plan.

Next Year's Top Performing Funds!!!

2008-09-05T14:50:00.002-05:00

No one ever prints a Magazine cover with NEXT year's Top Performing Funds. Not even the fund companies or brokerager companies know what funds or stocks are going to do well next year. If they did, they wouldn't NEED humdreds of funds and managers. They would have one predictably sound mutual fund, They don't. They hedge their bets. They create products for you. In reality they have no idea what their so-called experts will produce.

Now is Always the Best Time to be Prudent

2008-09-05T14:42:00.002-05:00

Many times investors who speculate or gamble with their money will lose large percentages or chunks in short periods of time. When they realize that their investing activities were imprudent, they want to change, but say, "I have to wait until it comes back before I can change my ways." Remember the same ill-advised strategy that failed can continue to squander your wealth. If you have broken the rules of prudent investing, NOW is always the best time to adopt a better way.

Markets Are Random

2008-09-05T08:55:00.004-05:00

Markets are random...Get Over It! If you invest in the stock market no one can "save" you from the down periods-NO ONE. If markets were not random and unpredictable , they wouldn't offer higher expected returns. Markets randomly and unpredictably go up AND down.

Financial Planner vs Coach

2008-09-04T11:03:00.002-05:00

I will concede that not all planners, brokers, or financial institutions are part of the problem. There are some very well-meaning people out there who do a great job, that make great recommendations, and help their clients. In my opinion, they are the exceptions to the rule because the industry at large is skewed against the investor. If the temptation is great enough, even a good person, an honest person, can end up being self-interested and hurting others. I truly believe that imprudent recommendations are unintentional, on the part of the planner, the majority of the time. They don't even know that they are doing it. They actually believe what they are doing is in the best interest of the client, In reality, it isn't. Whether you are using a broker or a person that calls themselves a financial advisor, the recommendations can easily become slanted and self-interested. Because of this, it is critical that you use a coach. What's the difference? A coach helps you make the prudent decisions about how much volatility and what types of risk you want to incorporate into your portfolio. He or she helps you distinguish prudent from imprudent risk. A good coach also aids you to truly understand and measure diversification in your portfolio, and works with you on what you really want your money to do in the future.

Investment Policy Statement

2008-08-26T13:17:00.002-05:00

Properly structured, an Investment Policy Statement (IPS) is a roadmap to fiduciary compliance for plan investments and should describe the ionvestment structure. ERISA's legal requirements and fiduciary best practices, the selection process and criteria, the monitoring process and criteria, and other investment duties. The IPS should be periodically reviewed and amended, as necessary. Once an IPS is adopted, a plan sponsor's fiduciary liability and its attendant risk can be best managed by establishing an on-going investment process, including; (i) maintenance of due diligence files and (ii) on-going analysis of each key provision in an IPS, including the retention of records concerning the subject and facts of discussion and questions and the conclusions reached on various issues.

Prudent Investment Process

2008-08-26T10:45:00.003-05:00

In determining whether a fiduciary has acted prudently, the focus of the inquiry is how the fiduciary acted in its selection of the investment, and not whether the investment succeeded or failed. As explained in a leading case: "(ERISA's) test of prudence....is one of conduct, and not a test of the result of performance of the investment." Department of Labor (DOL) guidance over the years provides some evidence as to what constitutes investment prudence. In selecting investment alternatives, a fiduciary should initially create an overall scheme of what investment choices there should be while identifying appropriate asset classes and investment styles, then identify a range of appropriate funds (taking into account such key factors as performance and fees), followed by an examination of relevant information such as prospectuses, and finally, make a decision on that basis. Thus, while neither ERISA nor its attendant regulations specifically require an investment policy statement ("IPS"), its general fiduciary provisions do appear to require a document setting forth guidelines for funding procedures, including selecting and monitoring investment options and investment managers.

Market Returns!

2008-08-26T10:18:00.005-05:00

Most investors have failed by a long shot to achieve market rates of return. Based on the Dalbar Study, the average investor has failed significantly to achieve market returns. While the S&P 500 has earned 10% over the last 20 years the average mutual fund investor has earned 4%. This is a stunning failure. Research shows the average actively managed mutual fund underperforms the market by two to three percent per year. Accepting this fact, the investor's job of allocating assets is greatly simplified. The investor only needs to allocate his/her assets into various asset categories to achieve market returns and remain disciplined over long periods of time. This is easier said than done and most often requires the aid of a coach. By focusing on market returns, there is no stock picking at all. No forecast, no prediction. There is no gambling on beating the market. You just own every single stock in that asset category. That's what we talk about when we refer to market rates of return.