Paul Winkler: And I am Paul Winkler. This is The Investor Coaching Show talking about money and investing, educating investors one at a time. Well, maybe perhaps more than one at a time, more efficient to educate investors, a lot of people at a time.
It just makes a little bit more sense.
Yeah. So I thought I would jump into something here, been an overriding theme of the show since day one, but I thought I would jump into it, maybe a little bit broad brush, but a little bit specific at the same time and talk about investment philosophy.
How I Got My Start in the Business
Now there are two very distinct investment philosophies that we might have as investors. And this is something I used to teach a workshop. It was called, it was actually “Choosing Your Investment Philosophy.”
And I had a continuum in the workshop, you know, like this line from left to right. And all the way on the left hand side was markets fail or marketing inefficiency If you will. If you’re from an academic background, that’s what it would be called: market inefficiency. All the way to the right, which says that markets work or markets that are efficient.
This was a big revelation to me. I was a broker for many years, too many, and I did a lot of insurance sales and those types of things; life insurance sales, annuity sales, mutual funds sales.
Maybe if you sell a little bit of property and casualty insurance, if you got yourself all over the place like I did. Home and auto insurance, maybe health insurance, disability insurance, long-term care, those types of things.
So pretty much anything in the financial world, I did it.
Yeah, because I was trying to find my way. Then I got into working with investments and got my licenses: Series 6, Series 63, Series 7.
I was learning and learning and learning, but I never felt like I really, really knew what I was doing. I always felt very hesitant to give people advice about their big sums of money that they had for retirement.
But as time went on, people would say, “Well, you need to do this. You need to recommend this.”
I had people around me saying, “Hey, you know, Paul, stay out of US markets.”
This is in the late ’80s, “Stay out of US markets. Just pretty much forget about it. Internationals where it’s at,” and blah, blah, blah, and it turned out to be the worst advice ever. So glad I didn’t tell anybody to do that.
But what happened as I was listening to people and finding out that they were wrong so many times when they would tell people, “Stay out of US investments,” and when they would tell people, “Buy this mutual fund. It has a great manager and the track record is really, really good.”
And, “Look at the 1-, 3-, 5-, 10-year track record of the funds,” and make recommendations based on, “Oh, this fund family is great. This family is low cost and that’s all that matters.”
There were all kinds of sales pitches out there.
And I would just really listen to them. And I find that some of the things that we were recommending to people, quite often, just didn’t work at all. And it was very frustrating.
And I found that I would stay away from whatever I didn’t really understand.
So what happened is I’m off at this meeting one day and this guy says something about variable annuities. It’s a form of annuity that uses a mutual fund type of an investment underlying. And he was talking about how the mutual funds inside these variable annuities had actually done better than the funds or the variable annuity sub-accounts had done better than the mutual funds that they were cloned after.
Well, you know, so if you look at that and you say, “Well, what on earth? How can that be? The annuities charge way more? How could a mutual fund inside of an annuity do better than the fund outside that was not subject to all those expenses?” That just doesn’t make any sense.
You know, the guy that’s sitting there at the table with me. “So, yeah, there’s some academics that are around teaching, and you might want to look into what these guys are teaching. You’re really inquisitive.”
So I said okay, and I kind of ignored it.
And then I got, all of a sudden, this guy just took an interest in me.
Sent me a set of tapes that were all academic cassette tapes, gives you an idea how far back this goes. And there were a bunch of cassette tapes.
And I started listening to these things and going, “Oh wow, oh my goodness. You know what? This makes so much sense.” And I couldn’t stop listening. And I go back and I listen again. And it was quite a bit of money to actually study under these guys, but I knew I had to do it.
Starting My Own Firm
A couple of years later I had been trying to implement what I was learning at the broker dealer. (When you deal with a broker dealer, you know, think Edward Jones, Raymond James, Merrill Lynch, all those are broker dealers.)
And I said, “I’ve got to get outta here. I can’t do this anymore.”
So my broker dealer was actually going under due to some lawsuits, and the lady that was the compliance lady said, “You know, these brokers had gone rogue is basically what had happened.”
And I felt sorry for the compliance lady. She was a really, really neat lady. But she said to me “Paul, so what are you going to do?”
And I said, “I don’t know, Beth. What are you going to do?”
She said, “I got to go to work for another broker dealer. I’ve got to go, you know, find another job.”
And I said, “I don’t know what to do.”
She goes, “You ought to set up a registered investment advisory firm.”
And I said, “What’s that?”
And she explained the whole idea of being a fiduciary and all that.
And I said, “Oh great. How do you do that?” And she helped me out with the whole process.
But basically what she said is what stuck with me. She says, “You have always kind of gone your own way anyway. And really oughta think about doing something completely different where you represent the client.”
So that’s a long story short: that’s what I ended up doing.
I ended up setting up a firm and a couple of years later started a radio show.
But what caught my attention was this whole idea of markets versus work markets fail—choosing your investment philosophy.
If you look at the research on the returns investors are getting in the stock market historically, and it’s a mixed bag.
These asset allocation funds where they divide money between stocks, bonds, and cash, the returns are well less than inflation has been. So if you’re trying to get an income from an investment portfolio in retirement, perish the thought.
Investors are getting bad returns, but is it because investing is bad? Is it because the stock market is bad? Is it because bond markets are bad? Is it because the asset allocation concept is bad?
And the answer would be no.
It is because our behavior is bad. It is because the behavior of the investment industry is really bad.
And you go, “What on earth are you talking about?”
Well, there’s a formula I teach: (I+E)*M>C
Our instincts plus emotions magnified by the media are greater than the cognitive part of our brain.
Instinctively, we go toward things we think are pleasurable and stay away from things that we think are not pleasurable and the things that are going to be painful.
And when it comes to investing, what could be more pleasurable than looking at an investment that has had a higher rate of return for the past 10 years than the investment that I happen to be in. I mean, just nothing looks more right than doing that.
Does Skill Drive Returns?
And why? Why do people choose investments based on recent performance?
It’s because people believe intuitively that it is skill that drives returns. You know, the skill of the investment manager, the skill of the investment advisor, that drives returns. They think, “If I could just find someone who really knows what they’re doing, I’ll get higher returns.”
And there is skill in investing, don’t get me wrong.
But when you choose investments based on recent performance—more often than not—you get into some serious trouble.
For example, In the late ’90s, technology companies had been outperforming every other area of the market. And if I had invested in, let’s say a broad portfolio owning all different sectors. Because, you know, technology is a sector. Inside the S&P 500 will be several sectors; You have the healthcare sector, consumer durable sector, you’ll have the energy sector.
There are different sectors that you can invest in. And technology just happened to be one of them.
So if a fund was focusing more on technology in the ’90s, it had a higher return. And somebody that was looking for a mutual fund would have naturally gravitated to the fund that just so happened to have more of that area of the market.
Now you could say—it’d be wrong—but you can say, “Oh, it was just because the investment manager just knew that area of the market was going to do better.”
And why would I say, “Well, you’d be wrong”? Well, because the investment managers that were managing that area of the market didn’t get out in time.
So if you’re market timing with sectors and if you happen to get in at the right time, you better know when the heck to get out.
The problem was that the biggest fund companies investing in the tech sector didn’t get out in time. These funds lost, yes, some of them 80% of the assets.
But investors looking for good funds in the ’90s would have owned all of the funds that happen to be investing in that particular area of the market, technology and large US companies, and growth companies in general.
Now in recent years, we’ve seen the same thing; we’ve seen large growth companies do really well. Now there are entire decades where large US growth companies absolutely have no return and do really badly. But we don’t even think about large companies at those points in time. That wouldn’t have been on our radar screen.
So what people do is this: they look at 5-, 10-year track records, and think that 10 years is a long period of time, and they choose investments based on it. Well, the reality of it is, the funds and the investments that have the best 10-year track records don’t typically go on to repeat.
Matter of fact, there was a whole thing about investment rating services and the high-rated funds—they are not a good predictor of future performance.
The highest-rated funds actually went on to have the poorest performance in subsequent periods.
Studies show that when you choose funds based on great track records that you end up disappointed more often than not.
But instinctively, we’re attracted to those funds. But that’s where our instincts are actually going against us.
Well, “So I’m just going to buy the worst performing funds?” Well, number one, most people just aren’t going to do that. And number two, there are poor performing funds that actually continue to do really poorly going on in the future. And it has to do with expenses. There are studies on that as well.
You do have to pay attention to expenses, you know, sometimes you’ll hear me rail against that because people go, “You know, I’m just going to buy the cheapest fund families.”
And I just shake my head and go, “You know what? Those cheapest fund families tend to focus all the money on asset categories that are cheap to manage, because it’s a selling point. You’re just getting misled in a different way when it gets down to it.”
And the media just perpetuates the myth because the media, well, how much does the media typically ever get right?
You got to ask yourself that question.
A lot of times they really miss the boat
So, number one, our instincts work against us and throw us off.
Don’t Take Mental Shortcuts
Going back to the formula: (I+E)*M>C
Number two is emotions.
And we as investors, we’re just emotional beings. We’re emotional basket cases.
You take risk tolerance questionnaires, for example. They’ve been coming under fire recently. Finally. I’ve been picking on them for 20 years.
Think about it after a market downturn. If stocks go down, how many of you really get all fired up and go, “Man, I just can’t wait to invest and put more money in my thing that’s been going down”?
And the reality is, no, we don’t go there. But, really, we think maybe that’s what we ought to do. Right. We ought to invest after it, instead of investing after something’s done really well.
But the reality of it is our emotions kick in and our fears drive behavior. If I want to get you to do something, the best way to do it is to scare the living daylights out of you.
“If you don’t do this, you’re going to lose everything!”
You know, “if you don’t do this, the market’s going to crash anytime now. And you’re really going to lose everything. So you better act on this. Now you better buy my newsletter or you better buy my annuity or you better buy my bond fund or CD or whatever.”
If I want to get you to do something, the best way to get you to do this is to scare you.
And unfortunately, there’s no limit to the number of people out there that are willing to do that to you. You know?
And again, the media does it all the time because they know you’ll listen, they know you’ll tune in. They know you will actually be attracted to a message that is doom and gloom. Look at the news, come on. It’s just the way things are. So I know that they’ll act that way.
Now if I try to appeal to greed, that might work on some people. I think you see that in funds using past performance.
What are they doing?
They’re playing around on your greed. You know, if I can play a little bit on both, I can protect you from downturns and I can give you the great upsides, man, I got you there, right?
I mean that is a bifecta, and it’s not a trifecta, but it is a great way of getting you to do something, you know, tell you we’re going to protect you from losing everything. And at the same time, we’re going to tell you that we’re going to make big money.
So greed and fear, two big ones.
Another one that we can get really pulled in by is loyalty. You know, I’ve just been with these people all for a long time, or my cousin manages money, or my son manages money. My daughter manages money, you know, my brother-in-law, or whatever.
Loyalty is a real thing that gets people trapped.
And a lot of times, people will gravitate to somebody that they want to be loyal to, or maybe you hear a commercial, right? And another thing that people get pulled in by is the perception of safety when something’s big.
You know, if a company is big, they must be trustworthy. When, in reality, maybe they’re big because they’re really good at selling stuff. And they have a gimmick that really catches people’s eyes or something that is really attractive. But it may not necessarily be the best thing for people.
But we look for mental shortcuts, and one of those mental shortcuts is big, trustworthy, and the reality of it, some of the biggest firms out there have the greatest number of lawsuits against them.
But it’s a shortcut that we use to try to determine what works, because when we feel like we can’t understand this stuff. It’s too complicated, but we end up shooting ourselves in the foot.
Studies show investors continually get bad returns.
I mean, there’s a company called Dalbar out of outer Boston. They do this research on investor behavior, and Morningstar does this to a certain extent as well.
And what they find is that investors are getting way lower returns than markets or the mutual funds that they’re investing in.
Why? It’s because of behaviors, how funds are marketed to them. It’s when cash flows go in, they go in at the wrong time. They come out at the wrong time.
And what happens is that you look at these numbers and go, “Wow.”
Across the board, we’re seeing this.
Well by definition, if investors, in general, in these studies are getting really bad results, and most of the money is being managed by really big investing firms. Can you make the connection that maybe the really big investing firms aren’t getting the job done?
You see, because the numbers by definition would be better if they were getting the job done. So that’s another mental shortcut we take.
And maybe another reason we will be loyal to that person is because they’re really nice.
But let’s face it. All financial advisors tend to be fairly nice people. They tend to be people-people.
And that’s not a good way of doing it, but it’s another mental shortcut that we take.
Or maybe that they actually are a big person in a charity that we favor. Maybe they do a lot of charitable work. And then what we do is we take the step over.
I’ve had people that actually have said, “Oh, I worked with this guy in a civic club that I was in for many, many years. And I thought that the person was really, really super reliable and responsible and just trusted . . . until many, many, many years into our relationship, the returns were horrible and I couldn’t figure out why.”
And I just shake my head and go, “Wow, there it is.”
It’s those mental shortcuts. So that is what we have a tendency to do. As investors, we tend to break rules of investing because we go based on these emotions and these instincts and the I and the E, and they get magnified by M, the media, because the media gets attention and they will attract your attention by using bad news or the latest thing.
And you make investment decisions based on the latest thing, and moving money around based on what is happening, and where I think what’s going to do well next, or advertising that I see.
Let’s face it, if you look at the media and said, “Well, where’s their source of money?”
By who? Big, monster mutual fund companies and investment firms. And if their source of revenue dries up, they’re out of business. So they will often just repeat things that come from their advertisers: the big investment firms and the investing world and the investing industry.
What the Research Shows
And what happens is the real juice of investing, so to speak—the knowledge that has come down from academia for 50, 60 years, even longer—gets ignored.
Why? Because of all of these factors that I have named. So what’s an investor to do?
You got disciples who say he is greater than C and instincts plus emotions magnified by the media is greater than C. Well, what’s the C stand for? The C stands for cognitive . . . understanding . . . knowledge.
And as I said, a lot of the information about investing that has been researched over the past 70 years is ignored, and people, well, “I think it’s too complicated. I can’t possibly understand any of this stuff. It’s way over my head.”
And the reality is it’s not over your head. Now we look at markets, you know, let me just talk about stock markets in general because here’s the belief. The belief has been that the investment manager’s skill is what gave me my return. And as I pointed out, not quite, right?
The market will have good runs. We don’t know when they’re going to end. We don’t know when they’re going to start. We don’t know when things are going to move from technology or very large companies, let’s say, over to a small cap.
Now there are people out there trying to figure it out. Now, why is it they have such a hard time figuring it out?
Because the market is a leading economic indicator. This is one of the reasons that it’s so stinking hard.
In other words, what happens is market prices change based on what’s going on right now, or in the next couple of months, but markets are adjusting to what might happen two to three years out. So the market may jump significantly in a single day, and you go, “well, why did it jump so much in a single day?”
And the answer would be because something just came out that tells us that maybe two years down the road, that . . . let’s say, the market jumped, that all of a sudden economic activity is going to be really high in a couple of years from now.
And that economic activity is going to lead to loss of profitability, because what am I buying when I buy stocks? I’m buying the rights to the profits of the company, but I’m not getting the profits that came out last year.
And so when you look at PE ratios (price to earnings ratios), that’s what you’re looking at, unless you’re looking at forward P and I’ll get to that in a second. You’re typically looking at PE, which is the price that the stocks are selling for compared to the earnings over the last year.
When I buy the stock:
I get the rights to earnings into the future.
So you might help that a little by looking at forward PE, which is telling you what the earnings are likely to be over the next year.
Be don’t even know that. We can guess at it;,we can look at sales. We can look at some of the marketing plans. We can look at the competition. We can look at who the CEO is. We can look at the board of directors. We can look at the operations. We can look at input prices like oil and energy and raw materials. And we can look at those things to get an idea what those earnings might be.
But do we ever really know what those earnings will be? Not really.
Now, if we don’t really, really know what the earnings are going to be over the next year, how on earth do we figure them out two years, three years, four years from now? And that’s really what you’re buying when you buy a stock for those earnings going all the way out.
So what happens is investors try to figure this out, and they try to pay a price today that is commensurate with what the earnings are going to be in the future. And it’s just really kind of a little bit of a guess, but an educated guess because there are a lot of inputs that go into it.
And then what happens is if I’m believing that I have somebody that is my investment manager, my financial planner, my advisor, that is going to get me in the right area in the market and make sure that they move the portfolio around at the right time.
I’m believing that they have a better bead on what those earnings are going to be than anybody else, which is a real stretch, a real stretch.
And it’s not backed by academic research either.
When we look at the research on investors and investment managers and their ability to get higher returns than the markets, it’s not good results.
Okay. You’ve got like over 90% of professional managers managing large US stock funds, failing to match what the S&P 500 does. You got small cap areas. It’s like 97% underperformance for 15 years, you know?
So you look at these investment managers, professionals, and then you’ll look at the investment advisors themselves.
There are studies on that. I’ve talked about that many, many times in workshops that I’ve done, and there’s a major study that’s recently just done in Canada showing that the investment advisors portfolios, they’re making the same mistakes with their own stuff that they’re making with their clients’ portfolios and not abiding by the academic research.
Another study, Indiana University, University of Southern California, same thing. They found, even after they retired, they were making the same mistakes.
But what was the problem?
Well, it was that they’re making the assumption that they have a bead on the future.
Then you’ll say, “Well, well, wait a minute. My advisor’s using index funds or ETFs.”
Yeah. They used theirs. That has been the new trend. And what are they doing with them? That’s what you don’t necessarily see how they’re changing, how much I have in this one versus how much in that one, how I’m moving money around.
Now, you can get a little bit of an inkling of it. If you look at the trade confirmations, but if you own a mutual fund, let’s say a big fund company, and you just have a big fund company, you own their mutual fund that is managing the money for you. You’re not paying any attention to it. You really need to pay attention to it.
But you know, one of the things I have people do is I say, “Okay. Take your statement right now; take your statement three years ago. And I want you to look at it. If you see big differences in how much is held in each asset category, like how much is in large US stocks, how much is the small US stocks? How much was in large value three years ago versus now how much it was in international large value, as opposed to now versus three years ago?
If you see changes in the percentages and if you’re a math person, this is easier. If you’re not a math person, this is where you really get in trouble.
And this is something we help people with all the time. This is something that’s really, really important to look at because that’s what’s called tactical asset allocation. It’s another form of market timing, but it’s an assumption that whatever I own more of, that it’s going to have a higher return.
Well, right there, you ought to go, “Wait a minute. There’s a problem, Paul. If I believe that there’s one area that ought to do better than anything else, why do I own any of the other areas?” That ought to cross your mind.
“Why is it I just own a little bit more of it in one time period versus another?” And bravo to you if that was what came to your mind. It’s even the investment world that doesn’t believe their own stuff.
The investment world doesn’t even believe their own schtick. You know?
So that’s one of the things that I can look at. I can look inside the funds. And, you know, if you had funds that you own, if they have a lot of what is called turnover, you know, if I have 40% turnover, that means 40% of the stocks are different from one year to the next.
What does that mean? That means they got rid of some stocks and bought new ones. Well, now what are they supposed to do? Because they’re the ones that have the skill to tell me which stocks I own.
Oh, there we go with skill again.
It’s the assumption that it was their skill that gives them better returns, or that’s a skill that gives them bad returns. So we get rid of the funds that had bad returns. You know, that buying and selling activity just creates expenses because that costs money.
Now, you don’t see it because it’s not in your management fee. So you may not even know that the expenses are there. And what happens is investors typically don’t know how to tell whether their funds are doing what they ought to be doing.
So what happens is they have underperformance, or they get way lower returns than they should have gotten.
And they don’t even realize it’s happening. And the way we do that is something called benchmarking. And what we should do is look at how the fund did versus the area the market was investing in. But back to the mixing of the portfolio, and then changing the mix on a regular basis.
When do You Make Changes?
Now, should there ever be changes? Yes, very gradually. You know, typically you’re not making big changes. Now you might make a big change if you have a total change in your time horizon.
Maybe somebody in your family passes away and you need to use the money way earlier than you thought you were going to, or you retire way earlier than you thought you were going to retire, or maybe something else happens. You’re actually going to work longer than you thought you were going to work. And then you might change your asset mix and how much you have in stocks versus bonds.
But wholesale changes and how much you have in value versus growth, or how much you have in small companies versus larger, how much you have in international versus US?
Because that is market timing in disguise.You’re assuming whatever you’re getting rid of is going to do worse than whatever you’re buying to replace it.
And studies when pensions engage in that? A major study. Brinson, Hood, and Beebower. And this was first done in 1986. So this isn’t like brand-new information that nobody knows. It was done in 1986, repeated in 1991, and repeated many times since then.
And what they found is that when pensions engaged in that activity, a study of 91 pensions, 91 pensions, they found when they engaged in the activities I just described. Zero. None of them improved returns as a result of their activity.
You think we’d learn.
But so often we just don’t. So we choose investments based on past performance. We look at track record.
We think that the investment manager’s skill is what got them the great returns. And, all of a sudden, we maybe discovered that that is not the case, and we have seen the light.
What About Indexing?
So what do investors actually often turn to—to solve these problems? Well, typically it is indexing as I alluded to. I talked about it, and you’ll see people use ETFs that are index-based and use them improperly.
But let’s just talk about. Let’s say that you were using them properly. Let’s say that you did see the light and you wanted to use the indexes and use them in a more proper fashion. You know, didn’t want to go market time anymore. Didn’t want to stock pick.
That’s the beauty of the indexes. They typically hold an area of the market. Like an index might be the S&P 500 or a total market index is very commonly seen.
So an S&P 500 is going to hold the 500 biggest companies and they’re going to hold them based on size. So the very, very largest company, most of the money will be in that.
When I buy an index fund that tracks the S&P 500, most of my money will be in the very biggest company.
The second most amount of money will be in the second biggest company. All the way down to the least amount of money will be in the smallest of those 500, roughly 500 companies. And if I buy a Russell 2000, it’s going to take the 2000 smallest of the 3000 biggest companies in the United States. And it’s going to hold those 2000 companies.
Most of the money is going to be in the largest of those 2000 companies all the way down to the least amount of money in the smallest. And then you do the same with the Russell 1000 value. Now you’re taking the 1000 biggest companies and you’re taking the value contingent out of that or the more distressed companies.
Like, why do I want to own distressed companies? Because distressed companies have to pay more to use your money.
And, ironically, when I add them to an investment portfolio, it reduces risk.
What? It reduces risk when you add distressed companies? Yes, because they don’t tend to move with the rest of the market.
That’s what academic research has shown. Very counterintuitive. A lot of the reasons search is very counterintuitive and hence the reason most investors don’t apply it is because it doesn’t seem to jive with what seems logical.
And that’s why investors get such bad results, because so much of investing. I mean, you think past performance, you know, something that’s done well, it ought to continue to do well.
You hear people say the market’s doing well, but I have to correct them.
No, it did well, if it’s just gone up—past tense. You don’t know what it’s going to do over the next five minutes. Now “the market is doing poorly,” and, no, it did poorly. It may shoot up after, you know, if you have a down day or something like that. Next day may be tremendously up. And you’ve probably seen this for yourself.
So it’s very counterintuitive.
But back to if I invest in an index fund, you may be kind of picking up on a problem. And that is, if I own a small company fund, a fund that’s investing in small cap stocks and an index. They’re going to overweight bigger companies.
Well, why on earth? Did I go and buy a small cap index? I didn’t buy it to overweight big companies. I bought it so I would own small companies.
Now they’re smaller in an index fund than a large cap index, but they tend to be a lot bigger than I might want to have. And a value fund, for example, if I’m over-weighting bigger companies in a value fund and I’m supposed to be owning these value stocks, the price should be lower.
It actually should be the opposite. I should be going the other direction.
So I end up a little bit more diluted, and that’s the problem that you run into with indexing in so many areas of the market.
International small companies, it’s hard to find indexes in some areas in the market where you’d have much greater diversification potential. International markets is a big area, small companies, and small value, small value international is a great diversifier, emerging markets small companies, emerging markets of value companies.
You know, so indexing is an improvement. And you know, when we look at the studies, we typically see everybody talking about what?
The S&P 500.
Why, because that is the area that indexing does work really, really well is in large US stocks. It doesn’t work necessarily as well. But we want you to get into the spirit of what indexing has to offer, which is, do not stock pick.
Don’t try to figure out which companies are going to do better than others. Now, when I put a portfolio together, you know, you look at it and go, “Okay, so I don’t want to stock pick, but I want to make sure my small company fund really owned small.”
So typically asset class investing, which goes way beyond this, but, you know, that’s what we do as far as a firm. That’s what we look for: we look for funds that are capturing asset classes based on factors and things like that. There are factors that drive investment returns way beyond the scope of what I can do today.
How to Choose an Investment Portfolio
But let me just talk about what you do when you’re choosing an investment portfolio. So the next thing that you think about is time horizon, and how you use time horizon to choose investment vehicles and put portfolios together.
As an investor, I’m investing for a certain period in time. I may be investing for life, but I may be investing for a certain goal. And your mix of your portfolio.
Typically, the first decision I tell people that we make as an investor is, “Okay, what am I using this money for?”
Now? You make decisions on taxes and tax treatment, IRAs, Roth IRAs, non-qualified accounts, those types of things in general.
Let’s say that I’ve got a goal that is 10-plus years away.
Well, in that particular case I can hold mainly stocks in that portfolio. If I have a shorter time horizon, because then, you know, if I look at all of my ten-year periods throughout history, I’m hard-pressed to find a 10-year period where I have a negative return in an all-stock portfolio.
So I can typically go off to that launch in stocks if I diversify between all the asset categories that I talk about.
Now, if I’m looking at a six-to-nine-year time horizon, well, now I’m looking at a little bit more bonds in the portfolio because I might have a six to nine year time horizon, where I have a negative return in an all-stock portfolio.
But if I started to add some bonds, you’re far less likely to have that happen.
Matter of fact, throughout history, we don’t have any time periods that long, that type of portfolio would have lost money.
Three to five years, half stocks, half bonds, if less than five years and three, maybe less than three years, I’m typically going to stick mainly with fixed income.
So your time horizon drives investing, based on market efficiency. Don’t expect to find mispricings or that any investment advisors are going to beat the market. It would be magical if they could.
We just don’t see the evidence in academic research that they can. And that is not the investment advisor’s job.
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