Hot Stocks Burn!

A little bit of knowledge can be dangerous, so its been said. And in the stock market, oh man, ain’t it the truth! Especially in a boom market like the technology heavy NASDAQ.

During the past nine years, ever since the financial world began healing from the Great Recession, the return on a NASDAQ index fund has been relentlessly positive.

Sure, temporarily, price dips into the dreaded valley of bears but give it a day or two or thirty, and charging bulls wrestle momentum forward as price resumes its heady ascent. Currently, the NASDAQ stands above 6110. A mere one year ago, it was at 4800. That’s a 27% gain in one year! Such a gain is outrageously potent when considering that equities historically return an average closer to 8%.

‘Ya, well, that was then, this is now. Get on board the gravy train or stand there with your hands in your pockets, money in a savings account and earn your 1%. Good luck with that!’

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Derailments Happen

More or less, that’s what Jake said to me the other day. Jake is in his late 70s. His wife, Nancy, passed away several years ago. Until bidding farewell, Nancy held the title of family investing guru. Despite having next to no knowledge nor experience with investing, Jake figured, how hard can it be?

And since he’s taken over the portfolio reins, Jake has done well. As have others who have invested in American based index funds.

But here’s the thing: Jake attributes success to his investing prowess. Fact is, Jake has no knack for investing, no know-how, no prowess. I don’t say this as a knock against Jake. Not at all. He’s a fine person with a warm disposition and a kind heart. It’s just that I know Jake well enough to understand that he’s been following the crowd.

And the investing crowd has been riding a tsunami sized wave of good fortune since late 2009. And for anyone whose investment days only just started after the last recession ended, it’s quite possible that all they’ve known are good times.

Cool. Good. Excellent for all who have seen their portfolio grind and bump higher and higher as the NASDAQ, S&P 500, Dow Jones continue to break records. And should Stock Market Gods continue to stoke global economies and shine light upon corporate profits then, hey, whose to say that, far from nearing its end, this party isn’t just getting started?

Hmmmm … hope for the best, nothing wrong with that. But choose to remain blind to the fact that the longest period of sustained economic growth in the USA was 10 years (1991-2001), that from the 20th century onward, recessions typically occur every three to six years, that we are currently in year nine of the economic expansion cycle … and you may be in for a nasty turn of your portfolio.

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This Is Not Chicken Little Calling

Jake talking:

‘Australia is experiencing its 26th consecutive year of economic growth; old age doesn’t derail economies, something has to kill them; consumers are spending; banks are lending; full employment; property prices rising … tell me: where’s the dark, foreboding cloud indicating recession and stock market collapse? Huh? Where?’

Absolutely, Jake. All signs look positively stellar. I mean, who can argue with what you just said or the zooming stock prices of Amazon, Apple, Google and Facebook this year? Wowzers!

But you know what? The stock market, and life, is about looking forward, not backward. Sure, we check out history to learn from others, to learn what worked and what didn’t. Still, as far as my limited knowledge reveals, we humans don’t know what’s coming in the next minute nevermind the next year or two or ten and beyond.

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What’s This Game All About

I’ll give Jake this: economies of the developed world are healthy and look to be getting stronger. And in year five and six and seven and eight, and now nine of the US expansion, pundits have been tripping over themselves to call the next recession and stock market downturn. Yet all they’ve done is fall flat on their face as growth continues and stock markets chug along.

But does this mean you shouldn’t be careful? (yes, yes, be careful!) Re-assess your portfolio? (again, yes!) Consider selling winners and taking profit (oh, yes!) rather than staying fully invested and letting all the chips ride? (yikes, don’t do that!).

Why? Because managing your portfolio is about managing risk. There is ALWAYS risk in your investment portfolio with some assets inherently riskier than others. And you can best manage risk by coming up with a plan that allocates fixed percentages of your portfolio to different asset classes.

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Laws Of Gravity Still In Play

Okay, real world example instead of blathering on: let’s say Jake’s plan involved allocating 20% of his investment portfolio to equities in the technology space, either through buying individual stocks or index funds. And with the gains Jake has made in the tech sector during the past few years, tech’s share of Jake’s total portfolio has ballooned to 45%.

Having too much exposure to tech, i.e., too much risk, makes for a portfolio out of balance. Because when (not if, but when) there’s a market fall, you can be sure that those tech related gains will wither if not evaporate entirely.

Now, since Jake wants to maintain technology exposure at 20%, assuming he accepts sage guidance from BuddhaMoney, he’ll happily sell 25% of his tech assets, pocket the profit, and reinvest elsewhere.

For example, maybe Jake will bump up his fixed income allocation (currently at 20%) and buy a Bond index or individual bonds because he wants to reduce portfolio volatility. Or maybe with interest rates seemingly, finally, on the rise, he’ll put his money to work in financial companies, banks and insurance, since their bottom lines tend to benefit from rising rates. Or increase his cash holdings (nothing wrong with cash; best to be patient and wait for opportunity rather than rushing into investment action).

Whatever Jake decides, the most sensible course of action is to maintain a balanced portfolio, diversified across asset classes (i.e., stocks, bonds, real estate), industries, and geographically. Because booms don’t last forever, crystal balls are the stuff of dreams, and the laws of gravity will not be repealed any time soon.

 

 

 

Is Stock Investing For You?

Who Are You?

If you want to do well in the investing game, you have to know yourself. What am I talking about? Know how you think, your behaviour patterns, and your emotional makeup. I’m not saying it’s easy, reflecting on yourself, questioning whether you’re as smart and beautiful as you think you are (okay, listen, you are smart and beautiful but that doesn’t mean you should stop asking the hard questions; I mean, think how much smarter you will be once the answers start flowing, and how much better you will be as an investor which, naturally, will make you that much more beautiful!).

Why should we take the time to understand our self? Because knowing what drives us in certain directions facilitates better decisions for ourselves, for our loved ones, and paves the way for a more peaceful journey, whether in the wide world of investing or in other worlds.

The Investor, The Bull and The Bear

During the so-called Great Recession of 2008-2009, with doomsday soothsayers operating in overdrive, how did you respond? And was your response any different during the rapid fire, insane, this is the big one, run for the hills, market collapse that we had in January/Feburary 2016? Was the end of capitalism nigh? Did you run to your investment advisor demanding that he/she sell everything? Did you bury your head and refuse to look at your monthly statements for fear of reading smaller and smaller numbers on the bottom line? Resign yourself to everlasting poverty? Dump your securities portfolio, buy gold, build a bunker, load up on hardware, ammo, spam and water?

Or, rather than allowing fear and panic to rule, did you tap into your inner Buddha who calmly reminded you that Bear markets last an average of 18 months and lose an average of 40%. And after the Bear retreats? The Bulls charge the stage for an average of 97 months. And in that time, the 40% and a whole lot more is recouped. The moral of the story of the Investor, the Bull and the Bear? When the Bear growls, it’s generally best to just sit there, and do nothing.

Chewy Bit. One of the more enjoyable authors in the Buddhism realm is Sylvia Boorstein who wrote a book playfully titled, Don’t Just Do Something, Sit There – http://www.amazon.com/Dont-Just-Something-Sit-There/dp/0060612525]

These numbers I’m throwing at you are all fine and dandy and true. But do they matter to you when, for the most part, you lead life with your heart? And if your heart is aching and telling you one thing, it sure is tricky to let that feeling go and allow your head to make the call.

So if fear or greed or anxiety or exuberance or any other heartfelt emotion are stressing you too much, recognize this about your self. Own it. And then follow your heart. Know how YOU respond to winning and losing investments, market run ups and market meltdowns. In short, what is your investment comfort level? Keeping in mind there is no right or wrong. This is about YOU and what works best for YOU.

If you know that you get all jittery when numbers start falling, then it’s best that you build a portfolio that will help smooth the ride, i.e., larger cash and fixed income component, less exposure to individual stocks (maybe adding Mutual Funds and/or Exchange Traded Funds for equity exposure instead of individual stocks). And if your temperature rises too fast when your portfolio is heating up, and you’re prone to convincing yourself that all of your holdings have a one-way ticket to the moon, then know that about yourself too, and stick to a plan that says you will sell a certain percentage of your holdings at certain price points. Because for the most part, moonshots return to Earth with a thud.

To give a hand up to your self-knowledge, take a look at the line graph below, setting out the typical emotional rollercoaster experienced by the vast majority of investors:

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Better yet, download this graph, stick it on your fridge and learn from it the next time (and there will be a next time) your emotions get out of hand.

Investing Archetypes

Active Investors buy and sell securities with a view to achieving a better return than market indexes (i.e., NASDAQ, S&P 500). This can be done. But keep this in mind: investment management firms and advisors don’t tell you that it’s not often achieved on a consistent, year-over-year basis. In fact, close to 80% of active fund managers perform worse than a range of Indexes over extended time periods, i.e., 2, 5, and 10 years. 80%! That’s a big ole’ whopping number that deserves your attention.

Passive Investors typically buy and hold Index funds. The advantage is you pretty much earn a return equal to the return of the particular Index. The disadvantage is that you will not do better than the Index. But for those who aren’t interested in excessive risk, and understand that less than 20% of Fund managers beat Indexes, the safer, less risk, less volatile, preserve the nest egg approach to investing suggests that Index funds are well worth considering for your portfolio.

Index Funds represent a simple approach, nothing fancy, hip, cool, trendy, or anything to brag about. It’s the turtle approach to investing; slow, steady, and possibly downright boring. And that’s exactly what most investors should seek: a boring, completely not sexy, portfolio that makes you money. And when the next chicken little is madly squawking about the sky falling, you can simply turn out the night light and pay no heed.

Chewy Bit. A stock market Index measures the value of a segment of the stock market. For example, if an Exchange Traded Fund tracks all US technology stocks, then that Fund’s return will be in line with the performance of all US technology stocks.