Tag Archives: Investment

Four Secret to Investing Outperformance – Motley Foolo

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“The average investor’s portfolio lags the performance of the S&P 500 by nearly 4 percentage points.”

The average retail investor’s portfolio lags the performance of the S&P 500 by nearly 4 percentage points, a DALBAR study shows. The lag is a result of bad behaviors by investors because investors jumped into funds when they were already at a high mark—with lower returns in their future—and dumped funds when they were on the way down, without waiting for a rebound.

The returns received by investors vs. returns earned by funds based on Morningstar data

There are four secrets to outperformance, according to Motley Fool, and the secrets are simpler than you might expect.

  • You take market returns – According to a 2020 study by financial research company Dalbar, average investors earned about 5% annual growth in their accounts over the last 30 years. That’s roughly half the average growth rate of the S&P 500 in the same time frame. You can avoid lagging the S&P 500 index by 4% to 5%. If you invest in S&P 500 index funds, you should see performance that’s only a fraction below the index.
  • You stay calm – The Dalbar report finds that 70% of the average investors’ underperformance occurred in volatile markets. Specifically, most of the investors who performed the worst sold their securities when the market was in crisis. Had they held on to those investments, they would have ultimately fared better. The takeaway here is it’s usually best to stay calm and stay invested.
  • Selectively, you do the opposite of the crowd – When everyone else is selling, it’s often a good time to buy. By following best practices such as not investing in a downturn unless your finances are in order; not expecting a quick return; and investing in a “quality” stock of an established company with low or manageable debt, experienced leadership, and consistent cash flows and profits.
  • You buy and hold  – The Dalbar report also concludes that a buy-and-hold strategy with the S&P 500 would have returned more than the average investor’s portfolio. Buy-and-hold investing is the practice of investing in stocks and funds that you intend to keep for years or decades. To implement this approach, pick quality stocks or funds and hold them indefinitely. You might sell if the company changes in some fundamental way, but you won’t sell because the market’s having a temporary crisis.

Hopefully, these four secrets to beating the average investor sound easy. They are, as long as you can resist making emotional decisions.

The average investor can get anxious about market volatility, and that’s often when shortsighted decisions are made. Even investors who can tune out market noise sometimes find it hard to avoid tinkering with a portfolio that doesn’t seem to be growing as anticipated.

When it comes to investing, patience is a virtue.

References:

  1. https://investor.vanguard.com/investing/portfolio-management/performance-overview
  2. https://www.fool.com/investing/2021/07/22/4-secrets-to-beating-the-average-investor/

The National Study of Millionaires

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“Anyone in America can build wealth. The only thing holding you back is you. Get out of debt. Save consistently. Keep your spending in check. Let time and compound interest do their magic. If you’re willing to work hard and keep the long-term goal in mind, you’ll reach the million-dollar milestone.” Chris Hogan

Summary

  • “The National Study of Millionaires” is the largest survey of millionaires ever with 10,000 participants.
  • Eight out of ten millionaires invested in their company’s 401(k) plan.
  • The top five careers for millionaires include engineer, accountant, teacher, management and attorney.
  • 79% of millionaires did not receive any inheritance at all from their parents or other family members.

The National Study of Millionaires by Ramsey Solutions concluded that millionaires successfully accumulated wealth through consistent investing, avoiding debt like the plague, and smart spending. No lottery tickets. No inheritances. No six-figure incomes.

Thus, according to the survey, there is positive news for Americans who may have lost hope that they can ever accumulate wealth. “The people in the study became millionaires by consistently saving over time. In fact, they worked, saved and invested for an average of 28 years before hitting the million-dollar mark, and most of them reached that milestone at age 49.”

The study’s results demonstrated a dramatic difference between how Americans think wealthy people get their money and how they actually earn and spend their money.

In a nutshell, regular, consistent investing over a long period of time is the reason most of the people in the survey successfully accumulated wealth. And, even when millionaires don’t have to worry about money anymore, they remain careful about their spending. Ninety-four percent of the people studied said they live on less than they make. By staying out of debt and watching expenses, they’re able to build their bank accounts instead of trying to get out of a financial hole every month.

The Biggest Mistakes Individual Investors Make

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“The public’s careful when they buy a house, when they buy a refrigerator, when they buy a car. They’ll work hours to save a hundred dollars on a roundtrip air ticket. They’ll put $5,000 or $10,000 on some zany idea they heard on the bus. That’s gambling. That’s not investing. That’s not research. That’s just total speculation.” Peter Lynch

For the 13 years, Peter Lynch ran Fidelity’s Magellan® Fund (1977–1990). During his tenure, he earned a reputation as a top performer, increasing assets under management from $18 million to $14 billion. He beat the S&P 500 in all but two of those years. He averaged annual returns of 29% which means that $1 grew to more than $27.

Additionally, Lynch has authored several top-selling books on investing, including One Up on Wall Street and Beating the Street. He has a plain-spoken manner and offers wisdom on investing that can help you become a better investor.

To become a successful investor, you really need to “have faith that 10 years, 20 years, 30 years from now common stocks are the place to be”, according to Lynch. “If you believe in that, you should have some money in equity funds.”

Yet, “there will still be declines”, Lynch says. “It might be tomorrow. It might be a year from now. Who knows when it’s going to happen? The question is: Are you ready—do you have the stomach for this?”

Long term, the stock market has been a very good place for investors to employ their money and capital. But whether the market will be 30% higher or lower in 2 years from now…nobody knows. “But more people have lost money waiting for corrections and anticipating corrections than in the actual corrections”, according to Lynch. “I mean, trying to predict market highs and lows is not productive.”

“In the stock market, the most important organ is the stomach. It’s not the brain.” Peter Lynch

Theoretically, in Lynch’s opinion, the individual investor has an edge versus the professional in finding winning companies (“10-baggers”) that will go up 4- or 10- or 20-fold. They have the opportunity to see breakthroughs, company’s fundamentals get better, and analyze companies way ahead of most people. That’s an edge and you need an edge on something to find the hidden gems.

“The problem with most individual investors is people have so many biases. They won’t look at a railroad, an oil company, a steel company. They’re only going to look at companies growing 40% a year. They won’t look at turnarounds. Or companies with unions.” Thus, individual investors miss great opportunities in overlooked industries or unjustly beaten down companies to chase hot growth stocks.

“But my system for over 30 years has been this: When stocks are attractive, you buy them. Sure, they can go lower. I’ve bought stocks at $12 that went to $2, but then they later went to $30.” Peter Lynch

“You have to really be agnostic” to pick winners and to invest in a company poised for a rebound, according to Lynch.

“Stocks aren’t lottery tickets. Behind every stock is a company. If the company does well, over time the stocks do well.” Peter Lynch

Peter Lynch’s eight simple investing principles for long term investors are:

  1. Know what you own – Few individual investors actually do their research. And, almost every investor is guilty of jumping into a stock they know very little about.
  2. It’s futile to predict the economy and interest rates (so don’t waste time trying) – The U.S. economy is an extraordinarily complex system. Trying to time the market is futile. Set up a financial plan that allocates your assets based on your risk tolerance, so that you can sleep at night.
  3. You have plenty of time to identify and recognize exceptional companies – You don’t need to immediately jump into the hot stock. There’s plenty of time to do your research first.
  4. Avoid long shots – Lynch states that he was 0-for-25 in investing in companies that had no revenue but a great story. Make sure the risk-reward trade-off on an unproven company is worth it.
  5. Good management is very important; good businesses matter more – “Go for a business that any idiot can run – because sooner or later, any idiot is probably going to run it.”
  6. Be flexible and humble, and learn from mistakes – “In this business, if you’re good, you’re right six times out of 10. You’re never going to be right nine times out of 10.” You’re going to be wrong. Diversification and the ability to honestly analyze your mistakes are your best tools to minimize the damage.
  7. Before you make a purchase, you should be able to explain why you’re buying – You should be able to explain your thesis in three sentences or less. And in terms an 11-year-old could understand. Once this simply stated thesis starts breaking down, it’s time to sell.
  8. There’s always something to worry about. – There are plenty of world events for investors to fear, but past investors have survived a Great Depression, 911 terrorist attack, two world wars, an oil crisis, 2007 financial crisis, and double-digit inflation. Always remember, if your worst fears come true, there’ll be a heck of a lot more to worry about than some stock market losses.

Finally, in the words of Peter Lynch…”You can lose money in the short term, but you need the long term to make money.”

References:

  1. https://investinganswers.com/articles/51-peter-lynch-quotes-empower-your-investing
  2. https://www.fidelity.com/viewpoints/investing-ideas/peter-lynch-investment-strategy
  3. https://www.fool.com/investing/general/2010/05/21/how-peter-lynch-destroyed-the-market.aspx
  4. https://www.fidelity.com/viewpoints/investing-ideas/peter-lynch-investment-strategy

Price Line vs. Earnings Line

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“A quick way to tell if a stock is overpriced is to compare the price line to the earnings line. If you bought familiar growth companies – such as Shoney’s, The Limited, or Marriott – when the stock price fell well below the earnings line, and sold them when the stock price rose dramatically above it, the chances are you’d do pretty well.” Peter Lynch

As the former head of Fidelity’s flagship Magellan Fund, Peter Lynch produced an annualized rate of return of 29.2% over his 13-year stint at the helm. This track record has arguably placed him as the best mutual fund manager of all time.

In his best-selling book, “One Up On Wall Street,” Lynch revealed a powerful charting tool, called the “Peter Lynch chart,” that greatly simplified his investment decisions. This simple graph plots the stock price against its “earnings line,” a theoretical price equal to 15 times the earnings per share.

When a stock trades well below its earnings line, you should buy, according to Lynch’s theory. When it rises above its earnings line, you should sell. For example, the Wal-Mart Stores (ticker: WMT ) share-price line fell below the Lynch line at about $55 in March 2010. It didn’t climb back over the Lynch line until June 2012, when shares were $67.50. Had you bought the first crossover and sold the second, you would have gained $12.50 a share, or about 23%.

The idea behind this technique is simple. Lynch believe that mature, stable companies are worth roughly 15 times their annual earnings. And over the last 135 years, this has proven to be the mean valuation of the S&P 500 index.

This is known as a the P/E ratio. It is merely the price of the stock divided by its earnings per share. The resulting multiple represents how many times you are paying for last year’s earnings at today’s stock price.

All things being equal, the lower the number the better. Low P/E ratios mean that you are getting more earnings for your investment dollar. And since most large cap stocks eventually trade for at least 15 times earnings, you are more likely to see your shares appreciate as they return to the 15 P/E level.

This simple idea was the basis of Lynch’s investment approach and the reason he created the chart whichconsists of only two lines. The first is the stock price. The second is the hypothetical stock price if it were to trade at a P/E of 15 (the earnings line).

It is a well-known fact among experienced investors that a stock’s price follows its earnings. Over multi-year periods, stock prices move in sync with changing company earnings.

But over the short term, stock prices are unpredictable. This is what creates valuable opportunities for savvy and patience investors.

Furthermore, a good rule of thumb is that the P/E ratio of any fairly valued company will equal its earnings growth rate. A company with a P/E ratio that is half its growth rate is very positive. A company with a P/E ratio that is twice its growth rate is deemed negative.

Thirteen attributes you should investigate for in a stock with the potential for 10x growth, according to Peter Lynch:

  1. The company name is dull or ridiculous.
  2. The company does something dull and boring
  3. The company does something disagreeable or disgusting.
  4. The company is a spin-off like the Baby Bells.
  5. Institutions don’t own it and analysts don’t follow it.
  6. There are negative rumors about it, like Waste Management.
  7. There is something depressing about it such as SRB, which provides burial services.
  8. That it is a company in a no growth industry, since it’s in a non competitive business.
  9. It has a niche such as drug companies.
  10. People have to keep buying the products such as drugs, food and cigarettes.
  11. The company is the user of technology such as Domino’s.
  12. The company insiders are buyers of the stock.
  13. The company is buying back its shares.

Best stocks to avoid is the hottest stock in the hottest industry. Negative growth industries do not attract competitors. Additionally, avoid companies with excessive debt on its balance sheet and invest in companies that have little or no debt.

The debt must always be lower than the equity. If the company has a debt lower than 50% of the equity, it is considered to be in a good financial position. If it is lower than 25%, it’s excellent. When the debt is above 75% of the equity, it is recommended to avoid that company.

References:

  1. https://finance.yahoo.com/news/peter-lynch-earned-29-13-231636799.html
  2. https://tofinancialfreedom.co/en/one-up-on-wall-street-summary-book/
  3. https://www.forbes.com/sites/investor/2021/04/16/lynchs-one-up-on-wall-street-inspired-screening-strategy/

The Laws of Wealth by Daniel Crosby

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“Get rid of the excuses and get invested.” Fidelity Investment

Daniel Crosby, author of The Laws of Wealth, presents 10 rules of behavioral self-management.

Rule #1 – You Control What Matters Most. “The behavior gap measures the loss that the average investor incurs as a result of emotional responses to market conditions.” As an example, the author notes that the best performing mutual fund during the period 2000-2010 was CGM Focus, with an 18.2% annualized return; however the average investor in the fund had a negative return! The reason is that they tended to buy when the fund was soaring and sell in a panic when the price dipped. More on volatility later…

Rule #2 — You Cannot Do This Alone. “Vanguard estimated that the value added by working with a competent financial advisor is roughly 3% per year… The benefits of working with an advisor will be ‘lumpy’ and most concentrated during times of profound fear and greed… The best use of a financial advisor is as a behavioral coach rather than an asset manager.” Make sure your advisor is a fiduciary. “A fiduciary has a legal requirement to place his clients’ interest ahead of his own.”

Rule #3 – Trouble Is Opportunity. “The market feels most scary when it is actually most safe… Corrections and bear markets are a common part of any investment lifetime, they represent long-term buying opportunity and a systematic process is required to take advantage of them.” The author quotes Ben Carlson: “Markets don’t usually perform the best when they go from good to great. They actually show the best performance when things go from terrible to not-quite-so-terrible as before.”

To do this is by keeping some assets in cash a buy list of stocks that are great qualitly, have a strong balance sheet and a strong brand, but are expensive.

Rule #4 – If You’re Excited, It’s a Bad Idea. “Emotions are the enemy of good investment decisions.”

Rule #5 – You Are Not Special. “A belief in personal exceptionality causes us to ignore potential danger, take excessively concentrated stock positions and stray from areas of personal competence… An admission of our own mediocrity is what is required for investment excellence… This tendency to own success and outsource failure [known as fundamental attribution error] leads us to view all investment successes as personal skill, thereby robbing us of opportunities for learning as well as any sense of history. When your stocks go up, you credit your personal genius. When your stocks go down, you fault externalities. Meanwhile, you learn nothing.”

Rule #6 – Your Life Is the Best Benchmark. “As a human race, we are generally more interested in being better than other people than we are in doing well ourselves.” However, “measuring performance against personal needs rather than an index has been shown to keep us invested during periods of market volatility, enhance savings behavior and help us maintain a long-term focus.”

Rule #7 – Forecasting Is For Weathermen. “The research is unequivocal—forecasts don’t work. As a corollary, neither does investing based on these forecasts…. Scrupulously avoid conjecture about the future, rely on systems rather than biased human judgment and be diversified enough to show appropriate humility.”

Rule #8 – Excess Is Never Permanent. “We expect that if a business is well-run and profitable today this excellence will persist.” The author quotes James O’Shaughnessy: “‘The most ironclad rule I have been able to find studying masses of data on the stock market, both in the United States and developed foreign markets, is the idea of reversion to the mean.’ Contrary to the popular idea of bear markets being risky and bull markets being risk-free, the behavioral investor must concede that risk is actually created in periods of market euphoria and actualized in down markets.”

Rule #9 – Diversification Means Always Having to Say You’re Sorry. “You can take it to the bank that some of your assets will underperform every single year… The simple fact is that no one knows which asset classes will do well at any given time and diversification is the only logical response to such uncertainty… Broad diversification and rebalancing have been shown to add half a percentage point of performance per year, a number that can seem small until you realize how it is compounded over an investment lifetime.”

Rule #10 – Risk Is Not a Squiggly Line. “Wall Street is stuck in a faulty, short-sighted paradigm that views risk as a mathematical reduction [of volatility]… a flaw that can be profitably exploited by the long-term, behavioral investor who understands the real definition of risk… Volatility is the norm, not the exception, and it should be planned for and diversified against, but never run from… Let me say emphatically, there is no greater risk than overpaying for a stock, regardless of its larger desirability as a brand.”

One of the most interesting concepts in the book is that investing in an index is not as passive as we might assume. Crosby quotes Rob Arnott: “‘The process is subjective—not entirely rules based and certainly not formulaic. There are many who argue that the S&P 500 isn’t an index at all: It’s an actively managed portfolio selected by a committee—whose very membership is a closely guarded secret!—and has shown a stark growth bias throughout its recent history of additions and deletions… The capitalization-weighted portfolio overweights the overvalued stocks and underweights the undervalued stocks…’ In a very real sense, index investing locks in the exact opposite of what we ought to be doing and causes us to buy high and sell low… Buying a capitalization weighted index like the S&P 500 means that you would have held nearly 50% tech stocks in 2000 and nearly 40% financials in 2008.”

“Once we realize that passive indexes are not mined from the Earth, but rather assembled arbitrarily by committee, the most pertinent question is not if you are actively investing (you are) but how best to actively invest.”

“Behavioral risk is the potential for your actions to increase the probability of permanent loss of capital… Behavioral risk is a failure of self… Our own behavior poses at least as great a threat as business or market risks… We must design a process that is resistant to emotion, ego, bad information, misplaced attention and our natural tendency to be loss averse.”

Crosby presents rule-based behavioral investment, or RBI for short. “The myriad behavior traps to which we can fall prey can largely be mitigated through the simple but elegant process that is RBI. The process is easily remembered by the following four Cs:

  1. Consistency – frees us from the pull of ego, emotion and loss aversion, while focusing our efforts on uniform execution.
  2. Clarity – we prioritize evidence-based factors and are not pulled down the seductive path of worrying about the frightening but unlikely or the exciting but useless.
  3. Courageousness – we automate the process of contrarianism: doing what the brain knows best but the heart and stomach have trouble accomplishing.
  4. Conviction – helps us walk the line between hubris and fear by creating portfolios that are diverse enough to be humble and focused enough to offer a shot at long-term outperformance.”

“Rule-based investing is about making simple, systematic tweaks to your investment portfolio to try and get an extra percentage point or two that has a dramatic positive impact on managing risk and compounding your wealth over time… We know that what works are strategies that are diversified, low fee, low turnover and account for behavioral biases.”

“Just like a casino, you will stick to your discipline in all weather, realizing that if you tilt probability in your favor ever so slightly, you will be greatly rewarded in the end… Becoming a successful behavioral investor looks a great deal like being The House instead of The Drunken Vacationer.”

The author quotes Jason Zweig: “You will do a great disservice to yourselves… if you view behavioral finance mainly as a window onto the world. In truth, it is also a mirror that you must hold up to yourselves.”

Crosby, Daniel. The Laws of Wealth: Psychology and the Secret to Investing Success. Hampshire, Great Britain: Harriman House, 2016.

Closing the Black Wealth Gap

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Black families have one-eighth the wealth of white families as a result of economic discrimination and institutionalized racism.

This year marks the 100th anniversary of the Tulsa Race Massacres. Over two days, a white mob in the city’s Black district of Greenwood killed an estimated 300 Black Americans and left nearly 10,000 destitute and homeless. The Greenwood area was known as Black Wall Street, an epicenter of Black business and culture.

The Tulsa Race Massacres is just one many thousands of violent and economic incidents throughout American history that created the wealth gap. As such, the Black wealth gap was created through centuries of institutional racism and economic discrimination that limited opportunities for African-Americans.

Wealth was taken from these communities before it had the opportunity to grow. This history matters for contemporary inequality in part because its legacy is passed down generation-to-generation through unequal monetary inheritances which make up a great deal of current wealth.

The racial wealth gap is a chasm with Black families owning one-eighth the wealth of white families. According to the Survey of Consumer Finances, in 2019, the median net worth of Black households was $24,000 as opposed to $189,000 for white households. This shortfall in financial wealth creates a cascade of inequalities in education, homeownership, and simply saving for emergencies.

Historically, Blacks were limited to certain neighborhoods and had more trouble borrowing to buy a home than white home buyers. Additionally, Black workers don’t advance to the top positions in companies at a proportional rate as other groups.

Moreover, African American families have had fewer opportunities to build generational wealth through home ownership, investments and inheritance. In this century, many Black families were stripped of their wealth and financial security by by both public and private institutionalized racism whether called Jim Crow or redline policies.

There are other factors: Many African-Americans, particularly older ones, are too conservative as investors. Only 34% of Black families own stocks, while more than half of white families do, according to a Federal Reserve. It is important to help African American investors get more comfortable with owning risk assets such as equity stocks, ETF and mutual funds that build wealth over the long term.

Do not seek shortcuts to build wealth

You must build wealth over time. If you’re saving 15% or 20% of your income over 30 years, there’s a good chance you will be wealthy. These methods truly work whether you’re making $50,000 or making $500,000 a year.

‘We just had an 11-year bull market. If you didn’t take the appropriate amount of risk, you’re significantly behind,” says Malik Lee, an Atlanta financial advisor whose clientele is more than 90% African-American.

American Dream for Black families

The heart of the American Dream for Black families is financial wellness, independence and freedom. There are many ways to express the American Dream, including owning their home, not living paycheck to paycheck, and being able to travel. Today, 69% of African American families are confident the American Dream is still attainable, according to MassMutual’s ‘State of the American Family’ survey.

Financial wellness for most families is the heart of the American Dream. American families tend to view financial wellness in terms of five common financial priorities:

  • Having an emergency fund
  • Feeling confident in both short-term and long-term financial decision making
  • Not carrying a lot of debt
  • Being financially prepared for the unexpected
  • Not living paycheck to paycheck

Black families are taking steps to secure their financial future and dreams, but more needs to be done to keep the American Dream alive. The top financial regret across all consumer groups surveyed is “not starting early enough.”

References:

  1. https://www.barrons.com/articles/this-advisor-wants-to-close-the-black-wealth-gap-accepting-risk-is-key-51625077456
  2. https://www.federalreserve.gov/econres/scf/dataviz/scf/chart/#series:Net_Worth;demographic:racecl4;population:1,2,3,4;units:median;range:1989,2019
  3. https://www.brookings.edu/blog/up-front/2020/02/27/examining-the-black-white-wealth-gap/
  4. https://www.massmutual.com/static/path/media/files/mc1133aa_09248mr-final.pdf
  5. https://www.forbes.com/sites/brianthompson1/2021/06/17/the-key-to-closing-the-racial-wealth-gap-black-entrepreneurship/

Time in the Market

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Time in the market, not timing the market

Investors have a bad tendency to do the wrong thing at the wrong time with regards to investing decisions. They want to panic sell when the market is getting hit really bad (sell low) or they fear that they’re missing out on the market rally and buy when markets start to go up (buy high). Successful investors know that it is impossible to predict a stock’s outcome. Any stock can result in a potential profit or loss, but the hope of “hitting it big” in the markets has led plenty of investors to try and time the market. Instead, it’s importance of investors to have a clear idea of their goals, as well as the time frame for their financial plan.

 Focus on time in the market – not trying to time the market

Timing the market involves trying to predict the future price trend of a stock and the market. As a result, there is a high probability of failure with this strategy, because no consistently predict the future of the markets. Although it sounds ideal to buy stock at a low price and sell it shortly after at a higher price for a profit, it’s often too good to be true. There are always people who get lucky, but that’s exactly what it is: luck. Essentially, someone may have luck with one stock, but lose it all on the next trade.

“The idea that a bell rings to signal when investors should get into or out of the market is simply not credible. After nearly 50 years in this business, I do not know of anybody who has done it successfully and consistently. I don’t even know anybody who knows anybody who has done it successfully and consistently.” John Bogle

It can be tempting to try to sell out of stocks to avoid downturns, but it’s nearly impossible to time it right.  If you sell and are still on the sidelines during a recovery, it can be difficult to catch up. Missing even a few of the best days in the market can significantly undermine your performance.

The most important course of action for investors is patience and maintaining a long-term mindset. History has repeatedly demonstrated the value for investor to stay invested in the market, even during a market sell off. Going back to 1930, if you had stayed exposed to the equity market, your returns would have been around 15,000%.

If you missed the top 10 performing days of each decade since 1930 because of mistiming the market over that period, your returns would be a mere 91%. And missing even a few days as the market rebounds can significantly diminish your returns, research from JP Morgan shows.

Keep perspective: Downturns are normal and typically short

Market downturns may be unsettling, but history shows stocks have recovered and delivered long-term gains. Over the past 35 years, the stock market has fallen 14% on average from high to low each year, but still managed gains in 80% of calendar years, according to Fidelity.

Investors must ignore the urge to panic and sell off their investments. Perspective is what is important during days like these and long term perspective is key. No one can consistently time the market and one of the most important factors in building wealth is time in the market.

Essentially, you don’t want to sell off your stock positions when the market has a bad day. Instead, ride it out. Research indicates that over the long-term, you reap the rewards of the power of compounding by staying invested in the market.

Rather than give in to emotion, stay the course. The wealthy are in the market for the long term. The headlines are scary, but there’s always going to be a new threat to investors, whether it’s election fears or whatever the Fed will do next.

References:

  1. https://www.cnbc.com/2020/03/31/bofa-keith-banks-warns-investors-against-trying-to-time-the-market.html
  2. https://www.prnewswire.com/news-releases/the-importance-of-time-in-the-market-vs-timing-the-market-301113822.html
  3.  The hypothetical example assumes an investment that tracks the returns of the S&P 500® Index and includes dividend reinvestment but does not reflect the impact of taxes, which would lower these figures. There is volatility in the market, and a sale at any point in time could result in a gain or loss. Your own investing experience will differ, including the possibility of loss. You cannot invest directly in an index. The S&P 500® Index, a market capitalization–weighted index of common stocks, is a registered trademark of The McGraw-Hill Companies, Inc., and has been licensed for use by Fidelity Distributors Corporation.
  4. https://www.fidelity.com/viewpoints/investing-ideas/six-tips

Investing Goals

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“If you avoid the losers, the winners will take care of themselves.”

If you’re new to the world of investing, figuring out how and where to start can be daunting. Investing involves putting your money into an asset with the hope that the asset will grow in value or generate profit over time.

Deciding on which goals, on different kinds of accounts and investments are critical first steps to get you moving in the right direction.

The world of investing can seem vast and overwhelming if you haven’t been a part of it before. But if you take things one step at a time, you can make a plan that’ll get you started on the right path toward your financial goals.

Put your goals first. It’s important to decide what those goals are. Maybe you want to save for retirement.

  • The Joneses are in debt…Make your lifestyle and purchasing decisions based on what you can afford, not what your peers are buying, and instead of coveting thy neighbor’s car, try to feel smug about your fat retirement account, your zero credit card balances, and the car you own free and clear.
  • If it’s good for the planet, it’s usually good for your wallet. Think: small cars, programmable thermostats, compact fluorescent lightbulbs, a garden, refilling your water bottle…the list goes on.

“The biggest mistake you can make is to stop laying the foundation of a generational wealth developing portfolio because it feels temporarily monotonous.”

The primary reason you are investing is to create or preserve wealth, and no one cares more about your personal financial situation — saving for the future, investing for the long term, and accumulating wealth — than you do. So be proactive. Do your research before buying a security or fund, ask questions of your adviser and be prepared to sell any investment at any given time if your reasons for selling so dictate.

Consistency is a key characteristic of successful investors. But as many longtime investors know, it’s hard to stay consistent when volatility whipsaws one’s portfolio, or when losses pile up, or even when one’s portfolio is perceived to trail those of one’s peers. All those factors can drive an investor to abandon their plan and make trades they might one day regret.

  • The secret to successful investing isn’t talent or timing…it’s temperament, according to Jean Chatzky, New York Times Bestselling Author and financial editor at the TODAY Show.. Sad but true–human psychology works against the behaviors that have historically led to good long-term returns.

    • Your goal should be excellence in investing. This means achieving attractive total returns without the commensurate higher risk. Your objective must be to strive for superior investment returns. Your first investment priority is to produce consistency, protect capital, and produce superior performance in bad times.

    It takes superior performance in bad times to prove that those good-time gains were earned through skill, not simply the acceptance of above average risk, according to Howard Marks of Oaktree Capital. Thus, you should place the highest priority on preventing losses. Since, it is should be your overriding belief that, “if you avoid the big losers, the winners will take care of themselves.”

    You can have too much of a good thing

    The power of asset allocation is all about building an intelligent portfolio of stocks, bonds, and other asset classes also means you’ll have less to worry about and more to gain. Asset allocation and asset class mix are a few of the most important factors in determining performance. Look at the size of a company (or its market capitalization) and its geographical market – U.S., developed international or emerging market.

    Financial advisory firm Edward Jones recommends that, when owning individual securities, you consider a diversified portfolio of domestic large-cap and mid-cap stocks. For the more volatile international, emerging-market and small-cap stocks, they favor a mutual fund to help manage risk. Remember, while diversification cannot guarantee a profit or prevent a loss, it can help smooth out performance over time since stocks, bonds, real estate, gold, and other investments move in different directions and are influenced by different economic factors. By holding multiple asset classes, you reduce your risk and increase the return you get per “unit” of risk you take on.

    References:

    1. https://www.forbes.com/sites/bobcarlson/2018/05/01/investing-as-a-business-what-the-tax-code-says/?sh=7b1c9f967bc6
    2. https://www.oaktreecapital.com/about/investment-philosophy
    3. https://investornews.vanguard/getting-started-with-investing/?cmpgn==RIG:OSM:OSMTW:SM_OUT:011921:TXL:VID:2MIN$$:PAQ:INVT:GAD:CSD:PRS:POST:GS:sf241078738&sf241078738=1
    4. https://www.edwardjones.com/market-news-guidance/guidance/stock-investing-benefits.html

    ARK’s Cathie Wood

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    “Cathie Wood is a star stock-picker and founder of ARK Invest, which invests in innovations like self-driving cars and genomics.” Forbes

    Cathie Wood founded ARK Investment Management seven years ago in 2014. One of the biggest secrets to ARK’s investment strategy and noteworthy success, according to Wood, is “the willingness to step in when others are selling a stock for very short-term reasons. We get great opportunities like that.”

    Wood said it “pains me more than anything” to think clients might be panicking and selling at the wrong time.

    Thus, Wood isn’t focused on short-term fluctuations. She takes a long term and bold view. “We have a five-year investment time horizon,” she says. Since, the big ideas blossoming todaywere planted 30 years ago, she says: “We are ready for prime time now.

    Additionally, Wood and her team has been early on many themes—they embraced active management when investing seemed inexorably tied to indexing; they implemented stock-picking in active ETFs while the largest asset managers said it couldn’t be done; and she bought companies that others thought were overpriced, a novelty, or both.

    Investing in transformative technologies that are going to change the world

    Wood’s focus has been on innovative companies with technology to disrupt the way we live. Her portfolios are loaded with stocks that have skyrocketed—for example, Tesla is a big holding in three of her funds. She is an advocate of a future where technology would make everything better, more productive and profitable.

    As Wood and her company’s research frequently remind investors, electrification, the telephone, and the internal combustion engine turned the world upside down a century ago. Now, she believes that five technologies—artificial intelligence, blockchain, DNA sequencing, energy storage, and robotics—are bringing about an equally profound transformation of the economy. These innovations will converge, recombine into things like autonomous taxis and whatnot, and create a perfect economic storm of higher wages, falling prices, and wider profit margins.

    Ark’s ideas start with their research. Wood researched stocks with dogged determination. “Cathie is insatiably curious; she was a voracious consumer of research from all over the Street. She read everything from everyone,” says Lisa Shalett, chief investment officer for Morgan Stanley Wealth Management.

    For example, they state that they take a blank sheet of paper and just say, “What is an autonomous vehicle? What’s the right way to build one? What are the critical variables?” They believe that they will inevitably run into the companies that not only have good answers, but are leading the charge

    She was on a mission to allocate capital to its best use—transformative technologies. Innovation is early-stage growth, and it is typically exponential growth. Companies developing these platforms can generate revenue growth of more than 20% [annually] for years and years.

    Wood looked at places that other investment analysts ignore. She found stocks that sat at the intersection of multiple industries, and weren’t followed by analysts from any side. This, she realized, is where innovation happens.

    Most growth companies have a decay rate, which means the bigger a company gets, the harder it is to grow. Exponential growth often includes network effects and virality, which means the more people joining the network, the more valuable it becomes, and the faster it grows.

    Wood’s believes in transparency when financial firms don’t allow portfolio managers and analysts to use social media to share their research or even gather information. At ARK, Wood created an open-source ecosystem, where the team can share research and collaborate with scientists, engineers, doctors, and other experts. Every Friday morning, she convenes an investment ideas meeting with her analysts and outside experts that’s part business school seminar and part free-form futurist bull session. “Most compliance teams would not be comfortable with that,” Wood says. “From the beginning, ARK actively shares the knowledge they’re generating.

    Conservative philosophy

    The dawning of a high-tech future is central to Wood’s life philosophy. In starting ARK, her goal was “encouraging the new creation,” by investing in “transformative technologies that were going to change the world.” The triumph of innovation also fits well with her free-market views. To a younger generation tempted by socialism, she’s hoping to show that capitalism can still work its magic.

    She’s conservative, both politically and economically. For decades she’s championed green investments. Wood has bemoaned President Joe Biden’s plans to spend big and tax the wealthy, even though many of his proposals are designed to bring the economy closer to her futuristic vision for it, and though higher capital-gains taxes could push more money into tax-efficient funds like hers. She warns that higher taxes on companies and investors will discourage future innovation.

    References:

    1. https://www.barrons.com/articles/arks-cathie-wood-disrupted-investment-management-shes-not-done-yet-51614992508
    2. https://www.bloomberg.com/news/features/2021-05-27/cathie-wood-is-a-believer-from-bitcoin-to-tesla-even-as-arkk-fund-stumbles
    3. https://www.barrons.com/articles/tesla-telehealth-and-the-genomics-revolution-power-ark-funds-51603450802

    Investment Risks and Taxes

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    No investment is completely free of risk.

    When it comes to investing, it’s critical to understand that no investment is 100% safe and all investments come with risk. Unlike when you store your money in a savings account, investing has no guarantees that you’ll earn a return. When you invest, experiencing a financial loss is a possibility.

    Investing means that you’re putting your money to work into a financial asset in the expectation of getting a positive return. Yet, where there’s the chance of financial gain, there’s always going to be the chance of a financial loss. Investment risk and investment reward are two sides of the same investing coin.

    On the other hand, saving — which is basically parking your money in an account so it’ll keep its value.

    Some investments are considered safer than others, but no investment is completely free of risk, because there’s more than one kind of risk, according to SoFi.

    Different Types of Risk

    Investors who choose products and strategies to avoid market volatility may be leaving themselves open to other risks, including:

    • Inflation risk – An asset could become less valuable as inflation erodes its purchasing power. If an investment is earning little or nothing (a certificate of deposit or savings account, for example), it won’t buy as much in the future as prices on various goods and services go up.
    • Interest rate risk – A change in interest rates could reduce the value of certain investments. These can include bonds and other fixed-rate, “safe” investment vehicles.
    • Liquidity risk – Could an asset be sold or converted if the investor needs cash? Collections, jewelry, a home, or a car could take a while to market—and if the owner is forced to sell quickly, the price received could be lower than the asset is worth. Certain investments (certificates of deposit, some annuities) also may have some liquidity risk because they may offer a higher return in exchange for a longer term, and there may be a penalty if the investor cashes out early.
    • Tax risk – An investment could lose its value because of the way it’s taxed. For example, different types of bonds may be taxed in different ways.
    • Legislative risk- A change in law could lower the value of an investment. For example, if the government imposes new regulations on a business, it could result in higher costs (and lower profits) for the company or affect how it can serve its customers. Or, if taxes go up in the future, savers who put all or most of their money into tax-deferred accounts [IRAs, 401(k)s, etc.] could end up with a hefty tax bill when they retire.
    • Global risk – An investment in a foreign stock could lose value because of currency problems, political turmoil, and other factors.
    • Reinvestment risk – When an investment matures (think CDs and bonds), the investor might not be able to replace it with a similar vehicle that has the same or a higher rate of return.

    Taxes

    “Worried about an IRS audit? Avoid what’s called a red flag. That’s something the IRS always looks for. For example, say you have some money left in your bank account after paying taxes. That’s a red flag.” Jay Leno

    Taxes are a key consideration for investors – and not one that investors might think about when logging into their brokerage account. Yes, $0 trades are exciting, but don’t forget about taxes — which are an investors “biggest expense” or every traders “silent partner”.

    The key to taxes is to not just think about taxes in tax season, because there’s not that much you can do besides contribute to an IRA.

    When it comes to tax planning, most of it has to be done before the year is over. One strategy that’s very useful is tax-loss harvesting. Essentially, it allows investors with any sort of investment losses to use that to offset any gains, reducing the amount of taxes owed.

    Investors can use the tax-loss harvesting proceeds to buy something else, and it can even be very similar. Or they can use the money to rebalance. “Don’t hesitate to take losses and use them to your advantage,” said Hayden Adams, director of tax and financial planning at Charles Schwab. “You’re likely to have losses and tax-loss harvesting is a great way to rebalance to get back to proper risk tolerance.”

    The key for investors is to know the rules and work within them.

    References:

    1. https://www.sofi.com/learn/content/what-is-a-safe-investment/
    2. https://www.businessinsider.com/safe-investments
    3. https://finance.yahoo.com/news/what-new-stock-traders-need-to-know-and-do-before-the-end-of-the-year-192426159.html