Wisdom

I read this article on a Wall Street Journal blog this morning:


Can you Sum Up Your Investing Philosophy in 10 Words?


It's well worth a look.  Here are a couple of my favorite 10 word or less investment philosophies:


"Anything is possible, and the unexpected is inevitable. Proceed accordingly"


"Invest for the long term and ignore interim aggravation."


"Do the math. Expect catastrophes. Whatever happens, stay the course."

And here is my entry:


"If it sounds too good to be true, it is"

Unintended Humor

Part of my job is to stay informed on the topic of financial planning, so I read several trade magazines every month, including, Investment Advisor, Financial Planning, Journal of Financial Planning to name a few.  Last week I was reading Financial Advisor magazine and I saw this quote in the Editor's Note:

"If there is any takeaway from the last four years, it has been that the collective intellectual firepower of the so-called experts could practically fit on a thimble." 

How great I thought, they finally get it. Good financial planning has nothing to do with looking for an "expert" who can predict what will happen in the future. Not only doesn't it help, it most likely causes bad decisions.
Then I made it to page 59 and saw this:

"Financial Advisor and Private Wealth magazines announce their inaugural all-star research team"

I couldn't help laughing out loud.  First, the editor of the magazine admits that "the experts" collectively added no edge to our ability to manage our way through the financial crisis, and then his magazine continues the same old practice of guessing which "experts" will be best able to help us manage our way through the future. Good luck with that.

Addendum:  I was asked to provide some further explanation of my comments.  Is it inconsistent for me to criticize "experts" when in fact I am an expert in financial planning.  For clarity, there are many people with an expertise in economics and finance who have a deep understanding of how these complex systems work. A lot of expertise goes into good financial planning, including an understanding of how broader economic issues affect personal finances.  The best use of this expertise is to help our clients make reasonable and thoughtful financial decisions.  What I am critical of is the media's reference to experts as people who can predict what will happen next. 

Last Word on 2011

Last week we sent out year-end performance reports to our clients and referenced the article below by Weston Wellington of Dimensional Fund Advisors.  He does a great job of discussing what investors went though in 2011 (click the article to make it easier to read):

Asset Class Update: 2011

It has been a while since we looked at the performance of the various equity asset classes we use within client portfolios.  I believe the last time was over two years ago, so it's definitely overdue.  Here goes:

You can see that 2011 was not a good year for stocks, with only Large Cap equities showing modest gains.  This explains why the S&P 500 and Dow Jones Industrial Average were positive for the year.  As we move down the list of asset classes, we see decreasing levels of performance, with Emerging Markets being the big loser for the year--down 18%.  This should not come as a surprise given all of the turmoil over sovereign debt which occurred last year.

The three year returns are actually encouraging.  Three years ago was the end of 2008, during the depths of the "financial crisis" when many experts were predicting a repeat of the Great Depression.  Even with the uneven economic recovery and continuing issues concerning debt and unemployment, the average asset class in the table returned 14% per year, which any of us would have signed on for on December 31, 2008.


What is more interesting, is when you look at the last column for 10 year annualized return.  Here we see almost the exact opposite of the 2011 results, with returns increasing as we move down the list.  To me, that illustrates the power of diversification. No one knows before hand which of these asset classes will perform better than any other over any period going in the future.  Basing an investment portfolio on such predictions is as likely to fail as it is to work, so our approach is to remained as diversified as possible all the time.


Finally, there is one important note.  The table above is not intended to show the performance of any investments or portfolios managed by Bond & Co.  It is a table of index returns, not actual investments which can be bought and owned by any of our clients.  Also, keep in mind that past performance is not an indication or guarantee of future results.

Now What

Now that we have entered the new year, there are a plethora of articles about what to do with your money and investments for 2012.  Most of these articles are not worth reading.  First of all, there is no reason to make investment decisions just because the calendar has changed from December to January.  The world is just as volatile and unpredictable as always.  Second of all, most predictions are wrong.  Investing should be about appropriate asset allocation and long-term thinking, not predictions about "what looks good for 2012".


All of that said, today I read an article entitled "Where to Put Your Money in 2012" written by Burton Malkiel, a Princeton economist whom I have referenced before. 


The article is well worth reading, not because of any predictions, but because Professor Malkiel does a great job of providing wise perspective about long-term investing.  Here is a  quote:

"Whatever the specific mix of assets in your portfolio at the start of 2012, you would do well to follow one crucial piece of advice. Control the thing you can control—minimize investment costs. That is especially important in a low-return environment. Make low-cost index mutual funds or ETFs the core of your portfolio and ensure that any actively-managed investment funds you purchase are low-expense as well."

Seduced by Complexity

It's rare when you read something that you completely agree with.  The article below is one of those times.  The authors web site is great, and I have posted some of his drawings before.

The article is easier to read if you click on it and open a new window.

Happy Thanksgiving!

As the doom and gloom continue, I highly recommend that you read this article from the Wall Street Journal by Brett Arrends:

Panicking About the Markets? Read This -- Now.  Here's a quick quote,

"Do yourself a favor. Stop worrying about Angela Merkel and Nicholas Sarkozy, John Kerry and John Kyl. Put aside your deepest concerns about the stability of the Spanish banking system and the latest austerity vote coming up in Athens or Rome. Take a deep breath. And give some thought to buying some good, high quality blue chip stocks. Yes, today.Thanks to the crisis, they're on sale. And they offer a compelling investment for all but the most risk-averse."

We hope everyone has a happy and safe Thanskgiving.

And the Answer Is...

On Friday I posted this video, which is a tongue and cheek look at the Euro debt crisis.  During the video, they do pose one very important question: Where will the rich Euro zone economies - Germany, France, etc.. get the money to bail out the poorer countries - Greece, Italy Spain,... when the rich countries have significant financial problems of their own and are already creditors to the poorer countries?  They put it much better in the video:

"How can broke economies lend money to other broke economies who haven't got any money, because they can't pay back the money the broke economy lent to the other broke economy and shouldn't have lent in the first place, because the broke economy can't pay it back?"

First of all, this is not necessarily a new phenomena.  Many times in the past, countries have borrowed money they couldn't repay.  The old solution to this problem was war: go to the country that owes the money and conquer them, taking their land, crops, gold, etc...  Fortunately, I don't think German troops are heading to Greece to claim the Parthenon any time soon.

So what will happen?  Where does money come from?  The answer is that the European Central Bank, along with other central banks, will "print the money".  This is what the US Federal Reserve did in response to the financial crisis in 2008. In our current global economy, there is no intrinsic value to money. It is created by governments to facilitate trade in goods and services.

I am not saying that all of this money creation is a good thing, just that it is likely to happen.  Right now, there is a struggle in Europe between the Germans and everyone else around this issue of money creation.  One of the most likely effects of this would be inflation, which is something the Germans have an institutional fear of (Think World War I and the Weimar Republic).

So this all goes back to the discussion I've had over the past several months about government debt in general.  One way out of a debt problem is to cause inflation, which may sound counter-intuitive to many. This makes the debt owed worth less, because debts incurred today will be paid back with currency that has lost purchasing power due to inflation. For example, if I owed you $10 but paid you back your $10 five years from now when it would only by $8 worth of goods and services, then I've "saved" $2. This is not a free lunch, and the price of inflation is paid by those who have savings and/or live on pensions or fixed incomes.  This means that it is imperative for retired people to keep some of their assets in investments that will earn some positive return above inflation, such as equities have done historically.  Socking away all of one's assets in bonds and cash can be disastrous when we are facing the potential for significant inflation in our not so far off future.

Of course, central banks could fail at their attempts to inflate. The economy is a very complex, unpredictable thing, and the digital revolution, along with China's re-awakening, have made things even more complex and difficult to predict.