Men's overconfidence and investing

One of the more interesting observed outcomes we see with some men is overconfidence about financial/investment topics. A recent article in the NY Times looked at a study by Vanguard of 2.7 million IRA accounts of men in 2008 and 2009. The study found that men tended to react more to market noise and sold at lows as a result. The men bought high and sold low. These findings mirror a study in 2001 by Schwab that concluded men lose almost one percent per year to such behavior versus women. We don't yet know if the reason is biological or something else. Perhaps we will someday but this reflects some of what we have experienced over the years.

Evidence Based Investing

We follow a cogent and coherent philosophy of investing grounded in the science of the markets. This approach is far different than what is proffered by the myriad of brokers and "financial consultants" who cling mostly to the "out-selection/market timing" strategy. I saw a quote recently from the president of Morningstar,Inc. (the mutual fund rating service) where he said "not one fund ever has put together a successful record based on market timing." Yet, the grand majority of investors still ,in whole or in part, follow that path.

We , of course, take a quite different route . Markets work and most of our clients need the long term premium returns available in the market. That is why we provide discipline to stay the course through both good markets and the inevitable bad markets. As we have said before, not being in the market is somewhat akin to financial suicide on the installment plan...you lose more in purchasing power terms with each passing month.

Birthdays- Market bottoms and tops

Today marks the 12 month anniversary of the market bottom for the S&P 500 index. The 70% rise from March 9 last year puts this among the best 12 month timeframes since the index was created in the 1950's. In retrospect, given the overall fragility of the economy this is a feat worthy of celebration.

Of further interest, tomorrow will mark the 10 year anniversary of the Nasdaq index (tech bubble) peak. March 2000 began a 31 month long decline finally bottoming in October 2002 . The Nasdaq is now more than double that bottom but still far off the March 2000 peak.

Job 1...Not Wealth Creation

I have attended many professional meetings over the years where the focus comes down to how to assist clients with wealth creation. Well, on the white board in the conference room at present we have written "Job 1 is NOT wealth creation. Rather , it is helping clients avoid big mistakes". The degree to which we succeed largely depends on how "advisable" the client may be. The holistic and independent perspective we occupy provides us an advantage over most others.

We all are going to makes some mistakes but we must avoid large mistakes , particularly those that result from "big bets" on business and real estate ventures . These tend to be particularly harsh and can have totally wreck an otherwise sound financial plan. Wealth creation...long term wealth creation, is about discipline and diversification. Sometimes the best advice we can provide a client is three simple words "don't do that".

The Fragile Empire

a good piece recently from Prof Niall Ferguson (author of The Ascent of Money) here . He has an interesting, historic perspective . Towards the end of the piece he describes the role that perception plays in the outcome. Extreme? Perhaps...perhaps not.

The Retirement Conundrum

Here is a simple chart from Prof Greg Mankiw's blog (originally from the Economist) that quickly demonstrates the primary problem in funding retirement today. Over the past 40 years or so the period of time in retirement has roughly doubled in the U.S. All of this while savings have declined and lifestyles increased. Not exactly a formula for success.

What is required? Far higher savings both inside and outside retirement plans; postponing retirement until age 70 or so; avoiding huge costly mistakes (big bet business /real estate ventures, divorce ,etc.) ; and maintaining long term discipline.

Fannie & Freddie

Fannie Mae, Freddie Mac and FHA all continue to bleed tons of red ink. Fannie is the largest and recently tapped their unlimited government credit card for another $15.3 billion - the 10th straight quarterly loss. For the whole of 2009 the loss was $74.4 billion - about $200 million per day! These entities, chartered by the government to provide liquidity to the home mortgage market have become perhaps the single largest "time bomb" in the financial sector. The borrowings from the government are "off balance sheet" and therefore not considered part of the collective federal debt numbers that are repeated now with frequency. Yet , even a cursory glance at government bonds in the financial pages show these as government obligations. The companies have a huge negative net worth but guarantee over $5 trillion of mortgages. They have become corrupt political pawns that no one fully understands.