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When To Sell a Stock

I got my MBA at Carnegie Mellon University back when it was Carnegie Institute of Technology, and the MBA was called a Master of Science in Industrial Administration. Carnegie is located in Pittsburgh Pennsylvania, where the Monongahela and Allegheny Rivers meet to former the Ohio River. In those days, one of the most beautiful sites, in my opinion, was to take the tram up Mt. Washington and look down into the city. Mt Washington is not really a mountain, it’s only a hill, but the vista was so impressive. The smokestacks of Jones and Laughlin Steel spewed tongues of dancing fire streams in hundreds, if not thousands, of colors. It was so impressive.

In the 1960s and into the 1980s, the United States dominated the world steel markets. US Steel and Bethlehem Steel were part of the DOW. Allegheny Steel, J&L Steel, and Inland Steel were dominant in the industry. Many of Europe’s steel mills were either destroyed or not really functional following World War II. Japan and the far east were just beginning to build steel mills. As the mills were rebuilt in Europe and new mills came on-stream in Japan, they functioned with new technology and manufacturing methods. They were beginning to make steel cheaper than the mills in the United States could manage.

The foreign competitors were producing steel was so much more cost effective that it could be transported from overseas and still be priced less than the American companies’ product. America was losing market share with their out dated mills, but instead of updating and modernizing the US steel companies went to Washington DC and began to lobby congress to pass tariffs on foreign made steel.

In the beginning, those tariffs protected the US producers in America, but their world dominance was passing away. The foreign companies continued to work on reducing manufacturing costs, while the American companies hid behind the tariffs.

Today, US steel companies have lost most of their market share, and some have disappeared completely. Those smokestacks of Jones and Laughlin Steel are gone. The place where that steel mill stood now houses and redeveloped shopping and living area.

We live in a world where the law is global competition. Companies who do not innovate and improve will eventually die and disappear. There was an expression in the 1950s and’60s: “If it is good for General Motors it is good for the United States.” That same General Motors suffered its own failure to recognize the changes in the marketplace and filed for bankruptcy in 2008. Will they survive in the longer-term? It is not certain.

Think of the DOW stocks from 1966, when the DOW first hit 1000: Bethlehem Steel, Union Carbide, Johns Manville, Anaconda Copper, American Can, Texas Corp, Swift and Co, Sears, Westinghouse Electric, and Woolworth all featured prominently.

There was a time when buying blue chip stocks, holding them, putting them in a drawer, would make a reasonable return. No more. The “blue chips” can become the “black-and-blue chips,” and even vanish entirely. That does not mean that holding stocks for 5 or 10 or 15+ years should be replaced by frequently trading. It does mean following the stocks and selling at the appropriate time.

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Potemkin Village

In my opinion Modern Portfolio Theory is a Potemkin Village. What does that mean?

In the 1700s Catherine the Great, ruler of Russia, invited a number of foreign dignitaries to visit Russia. But in viewing the countryside she saw the villages of Russia were unimpressive to say the least. So, she commissioned Field Marshall Griorgi Potemkin to build all new villages to give the impression that the citizens of Russia lived a comparatively good life. It was completely illusionary. A “Potemkin Village” is something made to look elaborate and impressive but has no substance at all.

Modern Portfolio Theory sounds like it is new and rational and “modern.” In fact the concept goes back to Irving Fischer an economist who, in the 1920s, conceived the idea of a “rational market.” A rational market which should obey economic “laws.” Those laws, once discovered, would govern the world of economics just as the laws of physics and chemistry and biology governed their respective fields.

In the late 1950s, Harry Markowitz opined that the movement in the price of a stock was related to two factors – the relative value of the company itself and the movement of the stock market. Markowitz labeled the two by the Greek letters “alpha” and “beta.” Beta was the impact of stock market movements and alpha the impact of the company. We hear financial analyst, money managers, news commentators, and financial advisors use those terms frequently. According to the economists and the financial “experts,” those terms describe the price of a stock and even a stock portfolio at any given time or over a given time period.

Art Cashin modernized what Bernard Beruch said almost 100 years ago: “The stock market is a perception market. Any time it believes 2 + 2 = 5, it will pay 4 ¾ all day long.” My corollary is that any time the market believes 2 + 2 = 3, it will sell at 3 ¼ all day long. We have only to look back at 1999 during the dot-com days to see the rush to pay 4 ¾ for the market all day every day. At the same time, looking back to 2008-09, we see the rush to sell at 3 ¼ day after day. Neither case was rational.

Modern Portfolio Theory sounds rational and logical. In fact it sounds good. When talking to financial advisors who espouse that they follow Modern Portfolio Theory, it sounds like they are on the cutting edge, and those of us who do not believe must believe in the “Old Portfolio Theory,” if such exists. It is the classic Potemkin Village. It is elaborate with its “efficient frontier” explanation of risk and reward. It is impressive with “asset allocation” to reduce volatility (and thereby risk). It has that feel-good feeling a rational, reasonable, and logical market. History shows it is an illusion.

Eugene Fama, who shared the Nobel Prize in economics in 2013, is a strong believer in the Efficient Market of Modern Portfolio Theory. His studies of money managers showed fewer than 7% do as well or better than the market over the longer term (5-10+ years) when fees are considered. I am happy to be one of those who has done better (check my performance page on this website for my figures). Fama is not alone in his studies and findings of money managers. Charles Ellis (Winning the Loser’s Game) found less than 10% of money managers doing as well- or better than the market in the 1980s an d 1990s.

The premise of Ellis’ book was for investors to set their expectations lower. That was the way to “win at the loser’s game.” I disagree. Investors should take a lesson from professional sports – football, baseball, soccer, or basketball, take your pick. If the manager is a loser, fire him and go search for a winner. The Department of Labor reports that a 1% reduction in performance over 20 years will reduce a nestegg by 17%! Think of what 3% or 4% or 5% will do. Let me repeat, if the manager of your portfolio is not beating the benchmark over the longer-term, fire him and find a manager who does. If you are managing your own stock portfolio and not beating the S&P 500 over the longer-term, fire yourself and hire someone who is likely to beat the S&P 500 over the longer-term.

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Let’s Play A Game

Imagine you are invited to play a game. You are given $20,000, and can bet $1,000, you win based on the flip of a coin. Heads, you would win $1,500; tails, you lose your $1,000 bet. Imagine you agree to the game and bet $1,000. The coin comes up tails. You bet again and the coin comes up tails and you lose another $1,000. Would you continue to play? If you do and the next flip comes up tails, would you continue? You have lost three straight times. Would you stop and walk away with your $17,000? What if you tried one more time and again lost. Would you call it quits?

What if instead of losing the first time the coin was heads? And the second flip came heads. Now you have $23,000. But on the third flip you lose $1,000 as tails comes up. Continue to play? If you do, and for a second time a tails come up and you lose another $1,000, would you take your $21,000, now a profit and walk? Or would you play again? And if you did and again the coin produced a tails. You are even with what you started with. Would you stop and go? Or would you continue?

When would you stop? Or would you play all the way to the end? A good percentage of people would stop before playing the full 20 rounds. The reality is, to maximize the return – or profit – you have to play all the way to 20 rounds without missing a single coin toss.

This game has been played as an experiment a number of times. Participants did not start with $20,000 but with $20. Statistically, by playing every round, there is an 87% chance of breaking even or making money in the game. If half the time loses and half the time wins, the player will end with $25,000. Yet most people will quit when they see two or three tails in a row. 87% chance of breaking even or making money versus only a 13% chance of losing; those are great odds. Yet 40% of the participants in the study would stop after one loss and only 58% played all 20 times. You would think as people understood the game better they would want to bet more often. Actually just the opposite happened. The longer the game went they more people dropped out.

What this says is that people are more fearful of losing money than rational and logical evaluating the odds of making money. It hurts to lose.

The standard approach for many money managers and financial advisors is this: Do not lose your client’s money. Emotionally, that probably feels good for most clients and especially those who lived through the Great Recession of 2008, but is it really in your best interest?

RW Baird did a study of all mutual funds with a 10+ year track record. They found 370 mutual funds that had done better than their benchmark by an average of 1% per year. But it was not every year they did better. 100% of the funds did worse in at least one year. 85% did worse in at least 3 years. And 1 out of four, 25%, did not only worse in three years, but worse by 5% or more for those three years. Yet each and every one of the funds at the end of ten years had done significantly better over that ten year time period.

If you are holding one of those funds, do you continue to hold on when they are not doing well? How do you know they will not continue to do worse? Do you switch and try to find the winners? Some people and advisors do. After all, isn’t the safest way to keep clients by keeping them from losing money?

Suppose today you went to your bank and withdrew $10,000 in cash with the intent to make a purchase. On your way to the store you were held up and a robber took the $10,000. How would you feel?  It is an immediate and hurtful loss, right? It deprives you of what you wanted to purchase.

In my opinion that is what happens when an investor chooses loss avoidance when the probability is in the investor’s favor to make money. A 1% reduction in return over 20 years will cut the value of a portfolio by 17% and 2% reduction by over 35%. That kind of reduction is the same as the stock market drop in 2008. But unlike the stock market drop, there is no recovery. That is opportunity money that is never going to be recovered. Underperformance is like the robber who comes and steals your money and is never caught. It is gone. That is why my emphasis is striving to do better than the market over the longer-term (5 to 10 years), and it is something I have done. While past performance is not a guarantee of future outcome, to accept mediocre performance in the name of safety really does usually lose opportunity money.

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Conferences and Comparative Money Making

Every year, I go to several investor conferences with 2,000 to 3,000 of my closest friends. Each conference has companies who underwrite part of the cost by taking the opportunity to hawk their products at exhibitor booths. I am always attracted to the trading booths with their elaborate displays – multiple computer screens displaying the latest technical analysis of stocks and markets, the latest prices, and charts with all the most sophisticated analytical tools. There are the stochastic charts, the candlestick trend lines, the moving averages, and on and on.

Surrounding the screens are the testimonials of who have made money using the tools and programs the vendors are showcasing. I should add that licensed financial advisors are not permitted to use any testimonials. Testimonials are a small part of an advisors’ book of clients. They may or may not be representative of the total performance of the advisor (and probably not – what advisor would use a testimonial of a client who lost money or who filed a complaint against the advisor?).

Obviously these vendors are not licensed as financial advisors. They are not going to show the testimonials of their clients who lost money. I am pretty sure there are plenty of those who have lost money, but I have no way to know whether or not that is true.

What is true is that some people, maybe all, have made money. That raises the question, “how much money?”

Dalbar and Associates is a research firm that, among other things, studies how mutual fund investors do compared to the S&P500 or other benchmarks if they are in bonds, balanced, or asset allocation funds. The study looked at a 30 year period, ending on 12/31/2014, and found that the average mutual fund investor did make money. Had they started at the beginning of those 30 years with $100,000 their portfolio would have grown to $286,002. The average mutual fund investor made $186,002. Seems good. They nearly tripled the worth of their portfolio.

However, if that $100,000 had been invested in the S&P 500, it would have grown to $2,122,469! The average mutual fund investor with $100,000 at the beginning of that 30 year time period would think they made money, but only a fraction of what that money could have made if invested otherwise.

So, when I go to the conferences and see those testimonials of investors using the trading platforms and making money, I do not see how much they would have made over the longer-term had they just done as well as the S&P500.

I do post how well my clients are doing compared to the S&P 500.

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On May 1st, 1975 the government deregulated fixed commissions in the brokerage industry. At the time, I don’t believe many in the industry would have said this would make any great impact on revenues, and history shows most chose to carry on with the status quo. Few stock brokers (that was the title financial advisers used back then) felt there would be much change in their business. One man did see an opportunity, though, and moved to found a firm that charged significantly less in transaction fees. That man, of course was Charles Schwab, who would build a significant and competitive that would capture one-third of portfolios by 1999. I think it isn’t unfair to say my industry is not good at seeing what innovations will reshape the industry. It is, after all, much easier to carry on with what you know.

And yet investing is nothing if not the practice of trying to predict success and innovation.

When I licensed in 1986, broker dealers (as financial advisors were called at the time) made up the largest percentage of the market, about 95%. To increase profitability those big companies began getting rid of any brokers who were not generating $75-100,000 in brokerage commissions. The average family income at the time was $43,000, but profitability was more important than loyalty to these big firms. Those dismissed brokers had licensed under the Securities and Exchanges Act of 1932, which made them registered representatives, and only required that they provide investment options “suitable” for each client. This meant that, if two investments fulfilled all the criteria for a suitable investment, the broker could suggest the one which gave her a greater kickback (if you’ve heard me go on about fiduciary responsibilities at all, you know my feelings regarding suitability).

Many of the brokers the big firms dismissed became independent and licensed under the Investment Company Act of 1940, which required that they have fiduciary responsivity toward their clients, and had to make every decision in the clients’ best interests. They are held to stricter oversight, and can be sued if their decisions are viewed as being anything other than in the client’s best interest. By the 1990s and 2000s it was not just the dismissed brokers who became independent, but larger producers who wanted out from under the big firms were leaving and licensing as Investment Adviser Representatives and Registered Investment Advisers. This channel of Registered Investment Advisors have gained momentum, and recently Cerulli released a report which said that in 2016, RIAs grew by 6%, and the large brokerage firms were down 1.6%; they predict that by 2019, registered investment advisors will have more assets under management than the brokerage houses.[1]

The big brokerage firms and their representatives (financial advisers) did not see the impact of the discount brokers. The big firms and financial advisers did not see the rise of RIA independent channel. As in the past, I believe that the financial industry will be disrupted again – this time by robo-advisors. When you look at most financial advisors’ performance, they put together portfolios which have generally underperformed. When I worked at those big firms we were told “to sell yourself and your personality, not your returns.” I began doing fee based accounts in 1991 when the general practice was to charge 3% on the first $500,000 or so of assets under management. Fees began to drop, in my opinion, because of poor performance. It is certainly hard to justify a 3% fee when the account is only growing at 5%. Many brokers have taken their fees down to 1% and below.

Not only are fees under pressure because of poor performance, but today almost all the same services financial advisors offer can be provided by robo-advisors at a 90% discount. I was sitting on the plane next to a financial advisor from a large brokerage firm. I asked what their value proposition was. He claimed it was the personal connection, willingness to meet in person, and willingness to “hold hands” during tough times in the market. He said nothing about delivering great performance. It is true that human financial advisors will do the things he mentioned. Is that enough to justify charging ten times what a robo-advisor will charge?

That advisor also commented the robo-advisor will be used by millennials but not their older clients (as millennials were the stated target). The fact is, we are seeing people across the spectrum (of age, income, and background) using robo-advisors. My Private Banking, an industry publication, produced a survey in 2016 which found that 40% of high-net-worth investors were considering using a robo-advisor.[2] Lower costs, convenience, and greater access to personalized options were all stated reasons for high-income interest in robo-advisors. One in five respondents were even concerned that their current financial advisor wasn’t making decisions in their best interest and thought they would see better advice from the robo-advisor.

Now the question is, when set side-by-side, what does the broker, or financial advisor, bring that the robo-advisor doesn’t? Robots are much more adept at compiling and analyzing data than the human brain, or even the very basic computing software (or more complicated, even) we use to put together financial plans. Frankly, I think financial plans as a whole are flawed, as we saw them come apart in 2008/09 (you can read those options in greater depth in other blogs). I hear you cry – robots don’t have that personal touch! But how many people still want that? I have a number of clients overseas that I have never met in person, others who live out of state and I only speak to them over the phone. Personality and the “human touch” aren’t valuable enough to have clients prioritize them over efficiency and lower fees.

Our value proposition at Adams Financial Concepts is to deliver over the longer-term superior performance. That is something the robo-advisors are not doing. That is something that the very large majority of financial advisors are not doing.

Josh Brown in his book Backstage Wall Street said this: “Most of the brokers I know and have met over the years are phenomenal, world-class sales people…But a great many of these security selling savants don’t attain the knowledge necessary to actually accomplish anything for their clients… Selling one’s expertise is much easier than actually developing an expertise, especially as it pertains to investing.”

If you look at other studies, Dalbar presented a report that said the average equity investor (including those who are clients of financial advisors) for the past 30 years has averaged a 3.69% return.[3] Compare this to the S&P 500, which is at 11.11%.The industry is going through a lot of changes, and I believe that the best selling point for a human advisor over a robot is the provide superior returns. That is what brings value to an advisor. Not human touch or better plans, but a tangible, superior return. The industry is changing again, and we, whether we are registered financial advisors, or brokers, or clients, must not imagine it will be slowed down. We must be prepared for what the future brings.

[1] Cerulli Associates Global Analytics. The Cerulli Report: US RIA Marketplace 2016. 2017.

[2] My Private Banking. Robo-Advisors 2015.

[3] Dalbar’s 22nd Annual Quantitative Analysis of Investor Behavior. 2016.

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The Myth of Excellence – Part Two

I’ve been talking about how companies are seeing their lifespans shrinking – particularly how short the lifecycles of companies in the S&P500 have become. If you’re an investor that favors the buy-and-hold strategy, this is an intimidating prospect. The days of finding that perfect company, buying it, and tucking it away in the proverbial sock drawer are coming to an end. The average lifespan of a company in the S&P500, a study by Yale Professor Richard Foster found, was only 18 years!1

With such a daunting new world for investors to face, I’ve been studying good business practice, and found myself agreeing with some of the points made by Fred Crawford and Ryan Mathews in their book The Myth of Excellence: Why Great Companies Never Try to Be the Best at Everything. They found that quality companies are defined by five attributes: Price, Service, Access, Experience, and Product (which I laid out in more detail in last week’s blog: Five Attributes: How To Spot A Solid Business Part 1). In order to stand out as a company and still be economically viable, a company needed to “dominate” in one of these five, “differentiate” in a second, and be adequate in the other three. I believe that it is a good way to begin looking at potential stocks to buy – do they meet these standards?

Knowing the most about running a financial advisory, I thought I would compare my company, Adams Financial Concepts (see the AFC Difference) and Edelman Financial Services, LLC, Ric Edelman’s financial advisory, and a company with a very difference focus than AFC. Edelman is generating over 25,000 leads each year through his radio show, TV appearances and ads, books, and around 800 seminars. He employs more than 113 advisors and has a number of offices around the country, and each is created with the same “cookie cutter” template – from the books laid out in the waiting room to the offered plans, they are identical across the country. Interestingly, 75% of clients say that Edelman’s is the best company they have ever worked with – among all companies, beating out Nordstrom, Starbucks, and the like.

If we look at Edelman’s in terms of the five attributes, it’s obvious that Access dominates their methodology: there is nothing confusing or elaborate about the company’s approach to working with their clients. Their tactics are consistent across the board, and it is comforting to their clients to have this straightforward product laid before them. They differentiate themselves with the Experience they provide; clients are treated well on a consistent basis and know what they are getting themselves into. Regarding the final three, their Service, Price, and Product are all average. They do what they do reliably, the price has been dropping, and they create dependably good financial plans, although, I believe, without a real focus on being the best.

I disagree with their model, and I believe that this shows in the attributes we see in AFC. I want to dominate in Product by offering product objectives and risks, and my own management has been proven to beat the market in the long-term. Although, past performance is no guarantee of future performance. There is an 11 year track record that is published for all to see, and it is a composite of all clients with no carve outs. AFC differentiates in Service, creating individualized portfolios and knowing every one of our clients as complete people, not just another set of numbers. Regarding Price, Access, and Experience, we do nothing unique or world-altering, but we work hard to recognize the needs of our clients and create a welcoming environment. As Myth says, it’s impossible to dominate or even differentiate in every single category.

I believe this model places the value on the longer-term of compounding. $100,000 invested over 25 years at 7% will yield $507,000. $100,000 invested at 15% will yield $2,862,518. While there is no assurance of achieving 15%, I do believe the emphasis on product and returns will be to the client’s advantage.


  • Foster, Richard. Creative Destruction Whips though Corporate America. 2012. Found:
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The Myth of Excellence – Part One

Buy and Hold was (and sometimes still is) a strategy to find great companies: purchase their stock and put it away to hold for decades. I still believe in buy and hold, but the timeline for the holding period has significantly shortened. I recently read a book by Fred Crawford and Ryan Mathews called The Myth of Excellence: Why Great Companies Never Try to Be the Best at Everything, and it got me thinking. In the 2010s, the lifespan of a dominating company is shrinking at a rate that CEOs find alarming. Today, the average lifespan of a company in the S&P 500 is only 18 years1. That is an incredibly short amount of time when we compare it to the lifespans of companies that have come and gone in the previous decades. If we look back to June of 2001, some of the biggest companies in the S&P 500 were Walmart, AOL, LUV, Lexus, Eddie Bauer, Citibank, and even Dell. Now think of how many of those companies carry the same power today as they did fifteen years ago. Think too of how commonplace newspapers and record stores and travel agencies were only fifteen years ago, all three of which were essentially replaced by the smart phone and the digitalization of media. So how, with this daunting reality, does a company stand a chance at maintaining relevancy? The Myth of Excellence has a few ideas that I think have value in finding companies that investors can buy and hold for a number of years

The Myth of Excellence approaches business through the lens of five attributes: Price, Service, Access, Experience, and Product.

Price: a survey mentioned by Myth states that Price, for most respondents, is not finding the service or product at the cheapest, but an “honest and fair price.” Price has become less about getting the cheapest option that does the job and more about finding quality and fairness. Striking that balance is what is important.

Service: the authors of Myth found that the surveyed were most impressed when they were treated well – “like an individual” on a day-to-day basis. When you order your coffee from your favorite joint, do they spell your name right? Are you told about the day’s specials? Or are you rushed out the door and treated like just another skinny venti cappuccino with sugar-free vanilla that has to get spun out?

Access: more than just physical location, access is the ability for customers to understand and feel comfortable with a service or product. There is a psychological aspect; is a product or service being sold with an honest, straightforward campaign?

Experience: it isn’t about being entertained, but experience is about, as with service, being treated like an individual – having questions answered correctly and interactions personalized. When you call the “help” line, is there a recording on the other end, or a person? Does the design of the store or website stand out and make you feel comfortable and want to go back?

Product: not necessarily about having the “best” product, but one that customers prefer, product focuses on creating a brand that is trusted, that has a culture that customers prefer, and that they will consistently choose over alternatives. Consider your relationship with your favorite brand of smart phone or cereal: what draws you to them above all others?

In order to stand out as a company and still maintain an economically viable company, a great company is one that truly “dominates” in one attribute, “differentiates” in another, and is adequate in the other three. It is not realistic, in most cases, to dominate or even differentiate in every single one. Finding what a company is good at and focusing on those areas is the most efficient and cost-effective way to stand apart in a world with massive competition and short lifespans.

Finding a company which is aware and capable of attributes and is able to use them to their advantage makes a decent contender for your buy-and-hold stock option.


  • Foster, Richard. Creative Destruction Whips though Corporate America. Found:
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The Value of Compounding

One of my favorite questions is: If you had a job for 30 days and could choose to either be paid $1000 every day or a penny the first day, doubled every day after, which would you choose?

Take a second. Think about it. I think this will help you make up your mind. If you calculate a penny a day doubled for 30 days it grows to over $10 million dollars. I know what I’d pick!

A penny doubling every day illustrates the principal of compounding. The bigger the beginning number, and the bigger the percentage at which it is compounded, the larger the final outcome. Take for example, the purchase of Manhattan in 1626. Peter Minuit paid local Indians a load of cloth, beads, hatchets, and other odds and ends worth 60 Dutch guilders. This was equivalent to $24. Sounds like the Indians were taken, right?

Yet, if those Indians had invested their $24 at a 7 percent interest rate, today it would be worth $4.9 trillion. Every city block of Manhattan would be worth $644 million. And, that is just for the land. It doesn’t include what’s built on it. Imagine if the Indians had invested at 10 percent. Their $24 would be worth $207 quadrillion now.

Are you thinking to yourself: “But, that would take over 300 years. I don’t have 300 years!” I couldn’t agree more. Do you have 25 years? If you invested $100 thousand at 5 percent for 25 years, it would grow a little over three fold. If you invested it at 10 percent, it would grow almost 10 fold. That’s $985 thousand!


For more information on all of these topics, I encourage you to listen to About Money, a weekly podcast and radio show. You can also follow us on Facebook and Twitter for blog updates, podcast news, and more!

I want to hear your opinions; please leave a comment below and let me know your thoughts.


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Structured Products

We’ve talked before about chocolate covered hand grenades – the too-good-to-be-true investment. Time and again, the market has expanded rapidly as investors get caught up in opportunities based on stories and ideas rather than facts.

Most of us are familiar with the explosion of Sub Prime Mortgages and how they played a major role in the Great Recession. Another seemingly tasty investment blew up as a result of the Great Recession. Structured products cost numerous investors big time.

What are structured products?
The term “structured product” is financial industry jargon referring to a product which allows you to participate in the stock market while guaranteeing your principal.

How do they work?
Originally, structured products were made up of two different elements: stocks and zero coupon treasuries. By spending half of your principal on zero coupon treasuries and holding onto them until they reached their full maturity, an investor would be able to, at a minimum, get their initial investment back.

Over time, investment advisors set up structures which reflected zero coupon treasuries and stock market investments. In theory, this was great. In reality, these structures were just paper. They weren’t based on facts.

What happened?
Lehman Brothers, a major brokerage house, created a variety of complex structured products which were sold by third parties. When they filed for bankruptcy in September of 2008, investors discovered the company’s collapse could cause them to lose most, if not all, their money. Why? They weren’t invested in real securities. They were invested in reflective securities. When they wanted their money, most investors ended up selling for $0.10 on the $1.00.

What’s the moral of the story?
Smart investments are made based on facts. If you invest based on stories and ideas, you most likely will get a blast of reality.


For more information on all of these topics, I encourage you to listen to About Money, a weekly podcast and radio show. You can also follow us on Facebook and Twitter for blog updates, podcast news, and more!

I want to hear your opinions; please leave a comment below and let me know your thoughts.


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Strategic Versus Tactical Investing

When it comes to investing, one of the biggest questions in my mind is strategic versus tactical management. Before we can discuss the merits of one or the other, I think we should clearly define both.

Strategic management focuses a financial portfolio on a group of assets.

Tactical management changes the asset classes of a portfolio depending on the economy.

So, which is better? In theory, tactical management sounds wonderful. You get in when the market is low and out when it is high. Unfortunately, this does not consistently yield the maximum returns to investors. Correctly guessing the exact moment to jump in and out of the market can have definite rewards. However, the key word is “guessing.” And, I believe guessing what will happen in the market is far riskier than just staying in. And I am not alone. The facts back me up. Just look at this 20-year financial study published in Money Magazine in August 2008:

Carla Fried analyzed the Standard and Poor’s 500 Index from 1982 to 2001. She discovered that $100,000 invested in the stock market in 1982 and left alone would have grown to $930,000. This is nearly a 10-fold increase.

What if you missed just the best 10 days? Carla’s study shows your portfolio would be cut nearly in half, totaling $560,000. If you missed the best 30, it would have dropped to $280,000. And if you missed the best 50 days, it would have gone down to just $150,000.

A financial advisor’s attraction to tactical management is understandable. It is extremely difficult to feel those losses. Yet, those who ride the ups and downs consistently come out ahead. Keeping your money in the market, even when things look bleak, means you don’t have to guess about what will happen in the market. I think guessing should be better known as betting. After all, there is a reason Las Vegas stays in business. When it comes to my financial future, I believe in calculated risks not hopeful acts.


For more information on all of these topics, I encourage you to listen to About Money, a weekly podcast and radio show. You can also follow us on Facebook and Twitter for blog updates, podcast news, and more!

I want to hear your opinions; please leave a comment below and let me know your thoughts.