Monday, November 24, 2014

What has the BIGGEST impact on your portfolio returns? The answer might surprise you

What has the BIGGEST impact on your portfolio returns? The answer might surprise you

In my last column I made the case for why it’s such a terrible idea – a lost cause, even – for trying
to pinpoint the best times to get in and out of the stock market. I’m hoping I was able to convince you to take that impossible, wealth-eroding enterprise off of your must-do list.

Today, I want to continue that discussion, but from a slightly different angle: By how much would you enhance the returns on your portfolio if you were able to perfectly time the stock market’s movements?

I must point out that we both already know this isn’t possible, but for the sake of this discussion, let’s say you or your financial advisor somehow had the proverbial crystal ball.

I think it’s a fantastic question, because the answer will really help you to decide whether it’s even worth the effort. At the end of the day, what it all comes down to is getting a good return on your savings, period.

According to the widely used Brinson, Hood, and Beebower (BHB) study into what really makes up the returns on a portfolio, here’s how an investment portfolio’s return breaks down:

  • Market timing: 1.8%,
  • Stock selection: 4.6%,
  • Other factors: 2.1%,
  • Asset allocation: 91.5%.
So say that a given portfolio earned 10 percent. Market timing will have contributed 0.2%, stock selection 0.5%, other factors 0.2%, and asset allocation 9%.

Now let’s put things into perspective. All things being equal, if you (or your financial advisor) were able to perfectly time the market by accurately predicting its exact movements with no error whatsoever, choose the right stocks/bonds, as well as arrange every other detail you feel is essential for the perfect portfolio investment, but got your asset allocation wrong, you’d have ended up with only a 1% return.

On the other hand, if you nailed your asset allocation (the broad proportionate mix of equities/bonds/cash) but botched the other three areas – including market timing, because you went about your daily business without constantly trying to predict what’s going to happen in the market on the next day – you’d have earned 9% out of the 10% return in this example.

So, my friend, you’ve got to focus on where the money is really going to come from – your broad asset allocation strategy – instead of wasting your time, energy, and emotions trying to time/predict the market for negligible results. And while on the subject, let me remind you once again that you shouldn’t allow the talking heads on TV, radio, or in print media to take you on a rollercoaster ride that could potentially rob you of what matters most.
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Want an independent assessment to confirm that you are on the right track when it comes to saving for your retirement, including the money you will leave to your heirs? Come in so we can help you to  objectively evaluate your current approach. Visit LaserFG.com or call 877.656.9111 right now to book your complimentary session

Monday, November 10, 2014

Now is a TERRIBLE time to get back in the stock market

Now is a TERRIBLE time to get back in the stock market

No, this is not intended as a joke, and I’m fully aware that it runs completely counter to the conventional “wisdom” of the media these days. Perhaps your own financial advisor is even busy encouraging you to take the plunge you’ve been resisting up until now, but if you’re one of the folks who, for one reason or another, are wondering whether or not now may be the right time to get in the stock market, my unequivocal answer to you is no, no, and no! Please don’t!

Here’s why. Trying to pinpoint a good time to get into and, for that matter, out of the stock market is an impossible task. No one has ever had the ability to predict that, nor will they ever be able to do that. If anyone tells you otherwise – that they know the specific times for you to get in and/or out of the stock market – I’d suggest you don’t walk, but run as fast as you can away from him/her. Whether it’s a website or an app or a TV “expert,” run, because if you don’t, you’ll end up destroying the very thing you’re trying to enhance: your financial future.

If you cannot handle the gyrations of your portfolio that led you to get out of the stock market in the first place, I suggest you simply stay out, because trying to time the market is not possible and you’re more likely to end up derailing your future. According to a recent study released by the independent research firm DALBAR, although the S&P 500 Index has averaged an 11.10 percent annual return over the past 30 years (1983 through 2013), the average person who owned an equity-based mutual fund over the exact same period earned only 3.69 percent!

Of course, many things may account for this dismal outcome. However, the data clearly points to a telling revelation that trying to time the market has failed terribly – as it always has and will continue to do. Over the 30-year period the survey covered, the average individual held any particular fund position for only 3.31 years.

Now here’s what has worked beautifully for our clients. Work with your advisor to design a broadly diversified portfolio with a risk tolerance you can live with and clear benchmarks/expectations to measure your progress along the way, and rebalance when appropriate.  Then let the portfolio actually do what it’s supposed to do. The real hurdle for you as an investor is finding a financial advisor who’s disciplined enough and has the guts to help you stay disciplined so that you can achieve your goals.
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Want an independent assessment to confirm that you are on the right track when it comes to saving for your retirement, including the money you will leave to your heirs? Come in so we can help you to  objectively evaluate your current approach. Visit LaserFG.com or call 877.656.9111 right now to book your complimentary session