In the recent financial crisis, a very small percentage of (I-bought-my-home-to-live-in) mortgagors stopped making their payments. Still, the hysteria over the bursting housing bubble (i.e., lower market values) led to financial institution road-kill because of ridiculous accounting rules.
When the dot-come bubble destroyed "new economy" gladiators in a gory spectacle destined to repeat itself over time, what investment portfolios cheered unscathed from the coliseum bleachers?
If you reduce the amount of betting in your portfolio (and throw out politicians who don't have a clue about the workings of free markets) you can safely navigate even the choppiest seas that the market, interest rate, and economic cycles roll your way.
The tide-like change of market values is the normal order of things, and until we embrace the cyclical nature of markets, all markets, our disappointment and disillusionment will continue. Portfolio market values will reflect where we are within the various cycles --- there are no "up only" assets.
Interest rate sensitive securities (all bonds, government securities, preferred stocks, and relatively high dividend equities) vary inversely with interest rate expectations, most of the time.
Where we are in the interest rate cycle is fairly easy to determine, and you need to position yourself to take advantage of the higher rates that will sneak into the economic formula as the cycle moves further and further from recent lows.
How do we prepare for higher interest rates? By designing the income bucket of the portfolio so that it refills itself with at least 30% of total portfolio realized income, and by owning income generating securities in a form that is easy to add to.
With a reality-based perspective, investors appreciate that falling market values are opportunities to add to portfolios. Loss taking and cash hording as stop loss measures for income portfolios is a flawed strategy from all but one perspective --- that of the salesperson.
That seemingly rational form of attempted market timing reduces the amount of income available for reinvestment and living expenses, in an approach that creates victims of higher interest rates instead of beneficiaries. You need to welcome both higher and lower interest rates, if for no other reason than that you can't prevent them.
Don't mess with the investment gods; accept the cycles they throw at you; respect and use them wisely for a better chance of investment success. Find meaningful numbers that signal cyclical change and which chart current positioning. Try the IGVSI and related Issue Breadth, High vs. Low, and Bargain Monitor analytics.
Bohicket Creek, in coastal South Carolina, has tides ranging from four to seven feet, twice a day, every day --- not unlike the gyrations of the stock market. If you are in the ocean at high tide, and stay too long, you risk walking home shin-deep in Pluff Mud a few hours later.
Boaters run aground by not paying attention to tides, charts, navigation tools and their GPSes. Investors get swamped with information, media noise, breaking news, politicians, gurus, and derivatives --- so much so that they can't see the oncoming fog banks and tsunamis of cyclical change.
Most investment mistakes are caused by basic misunderstandings of the securities markets and by invalid performance expectations. Losing money on an investment may not be the result of an investment sandbar and not all mistakes in judgment result in broken propellers.
Errors occur most frequently when judgment is rocked out of the boat by emotion, hindsight, and misconceptions about how securities react to varying economic, political, and hysterical currents. You are the commander of your investment yacht. Use these ten risk-minimizers as investment capital life preservers:
1. Identify realistic goals that include time, risk-tolerance, and future income requirements --- chart your course before you leave the pier. A well thought out plan will minimize tacking maneuvers. A well-captained plan will not need trendy hardware or exotic rigging.
2. Learn to distinguish between asset allocation and diversification. Asset allocation divides the portfolio between equity and income securities. Diversification limits the size of individual holdings in several ways. Both hedge against the risk of loss. Both are done best using a cost based approach.
3. Be patient with your plan and think of it as a long-term voyage to a specific destination --- change direction infrequently and gradually. There is no popular index or average that matches your portfolio, and calendar sub-divisions have no relationship to market, interest rate, or economic cycles.
4. Never fall in love with a security. No reasonable profit, in either class of security, should ever go unrealized. Profit targeting must be part of your plan, and keep in mind that three sevens beats two tens --- and two or three times easier to achieve.
5. Prevent "analysis paralysis" from short-circuiting your decision-making powers. Limit the information you allow into your course charting process, and avoid any form of future prediction or bet covering.
6. Burn, delete, toss-out-the-window any short cuts or gimmicks that are supposed to provide instant stock picking success with minimum effort. Consumers' obsession with products underlines how Wall Street has made it impossible for financial professionals to survive without them. Remember: consumers buy products; investors select securities.
7. Attend a workshop on interest rate expectation (IRE) sensitive securities and learn to deal with changes in their market value --- in either direction. Few investors ever realize the full power of their income portfolio. Market value changes must be expected and understood, not reacted to with fear or greed. Fixed income does not mean fixed price.
8. Ignore Mother Nature's evil twin daughters, speculation and pessimism. They'll con you into buying at market peaks and panicking when prices fall, ignoring the cyclical opportunities provided by their Momma. Never buy at all time high prices and avoid story stocks religiously. Always buy slowly when prices fall and sell quickly when targets are reached.
9. Step away from calendar year, market value thinking. Most investment errors involve unrealistic time horizon, and/or "apples to oranges" performance comparisons. The get rich slowly path is a more reliable investment road that Wall Street has allowed to become overgrown, if not abandoned.
10. Avoid the cheap, the easy, the confusing, the most popular, the future knowing, and the one-size-fits-all. There are no freebies or sure things on Wall Street, and the further you stray from conventional stocks and bonds, the more risk you are adding to your portfolio.
Compounding the problems that investors face managing their investments is the sensationalism that the media brings to the process. Investing is a personal project where individual/family goals and objectives must dictate portfolio structure, management strategy, and performance evaluation techniques.
It is not ever a competitive event, and sound advice does not come in flashy sound bytes.
Do most individual investors have difficulty minimizing investment risk in an environment that encourages instant gratification, supports all forms of speculation, and gets off on shortsighted reports, reactions, and achievements?
You bet they do!
Return to Part I. Google: Risk, The Essence Of Investing
Steve Selengut http://www.marketcycleinvestmentmanagement.com/
Author of: "The Brainwashing of the American Investor: The Book that Wall Street Does Not Want YOU to Read", and "A Millionaire's Secret Investment Strategy"
When the dot-come bubble destroyed "new economy" gladiators in a gory spectacle destined to repeat itself over time, what investment portfolios cheered unscathed from the coliseum bleachers?
If you reduce the amount of betting in your portfolio (and throw out politicians who don't have a clue about the workings of free markets) you can safely navigate even the choppiest seas that the market, interest rate, and economic cycles roll your way.
The tide-like change of market values is the normal order of things, and until we embrace the cyclical nature of markets, all markets, our disappointment and disillusionment will continue. Portfolio market values will reflect where we are within the various cycles --- there are no "up only" assets.
Interest rate sensitive securities (all bonds, government securities, preferred stocks, and relatively high dividend equities) vary inversely with interest rate expectations, most of the time.
Where we are in the interest rate cycle is fairly easy to determine, and you need to position yourself to take advantage of the higher rates that will sneak into the economic formula as the cycle moves further and further from recent lows.
How do we prepare for higher interest rates? By designing the income bucket of the portfolio so that it refills itself with at least 30% of total portfolio realized income, and by owning income generating securities in a form that is easy to add to.
With a reality-based perspective, investors appreciate that falling market values are opportunities to add to portfolios. Loss taking and cash hording as stop loss measures for income portfolios is a flawed strategy from all but one perspective --- that of the salesperson.
That seemingly rational form of attempted market timing reduces the amount of income available for reinvestment and living expenses, in an approach that creates victims of higher interest rates instead of beneficiaries. You need to welcome both higher and lower interest rates, if for no other reason than that you can't prevent them.
Don't mess with the investment gods; accept the cycles they throw at you; respect and use them wisely for a better chance of investment success. Find meaningful numbers that signal cyclical change and which chart current positioning. Try the IGVSI and related Issue Breadth, High vs. Low, and Bargain Monitor analytics.
Bohicket Creek, in coastal South Carolina, has tides ranging from four to seven feet, twice a day, every day --- not unlike the gyrations of the stock market. If you are in the ocean at high tide, and stay too long, you risk walking home shin-deep in Pluff Mud a few hours later.
Boaters run aground by not paying attention to tides, charts, navigation tools and their GPSes. Investors get swamped with information, media noise, breaking news, politicians, gurus, and derivatives --- so much so that they can't see the oncoming fog banks and tsunamis of cyclical change.
Most investment mistakes are caused by basic misunderstandings of the securities markets and by invalid performance expectations. Losing money on an investment may not be the result of an investment sandbar and not all mistakes in judgment result in broken propellers.
Errors occur most frequently when judgment is rocked out of the boat by emotion, hindsight, and misconceptions about how securities react to varying economic, political, and hysterical currents. You are the commander of your investment yacht. Use these ten risk-minimizers as investment capital life preservers:
1. Identify realistic goals that include time, risk-tolerance, and future income requirements --- chart your course before you leave the pier. A well thought out plan will minimize tacking maneuvers. A well-captained plan will not need trendy hardware or exotic rigging.
2. Learn to distinguish between asset allocation and diversification. Asset allocation divides the portfolio between equity and income securities. Diversification limits the size of individual holdings in several ways. Both hedge against the risk of loss. Both are done best using a cost based approach.
3. Be patient with your plan and think of it as a long-term voyage to a specific destination --- change direction infrequently and gradually. There is no popular index or average that matches your portfolio, and calendar sub-divisions have no relationship to market, interest rate, or economic cycles.
4. Never fall in love with a security. No reasonable profit, in either class of security, should ever go unrealized. Profit targeting must be part of your plan, and keep in mind that three sevens beats two tens --- and two or three times easier to achieve.
5. Prevent "analysis paralysis" from short-circuiting your decision-making powers. Limit the information you allow into your course charting process, and avoid any form of future prediction or bet covering.
6. Burn, delete, toss-out-the-window any short cuts or gimmicks that are supposed to provide instant stock picking success with minimum effort. Consumers' obsession with products underlines how Wall Street has made it impossible for financial professionals to survive without them. Remember: consumers buy products; investors select securities.
7. Attend a workshop on interest rate expectation (IRE) sensitive securities and learn to deal with changes in their market value --- in either direction. Few investors ever realize the full power of their income portfolio. Market value changes must be expected and understood, not reacted to with fear or greed. Fixed income does not mean fixed price.
8. Ignore Mother Nature's evil twin daughters, speculation and pessimism. They'll con you into buying at market peaks and panicking when prices fall, ignoring the cyclical opportunities provided by their Momma. Never buy at all time high prices and avoid story stocks religiously. Always buy slowly when prices fall and sell quickly when targets are reached.
9. Step away from calendar year, market value thinking. Most investment errors involve unrealistic time horizon, and/or "apples to oranges" performance comparisons. The get rich slowly path is a more reliable investment road that Wall Street has allowed to become overgrown, if not abandoned.
10. Avoid the cheap, the easy, the confusing, the most popular, the future knowing, and the one-size-fits-all. There are no freebies or sure things on Wall Street, and the further you stray from conventional stocks and bonds, the more risk you are adding to your portfolio.
Compounding the problems that investors face managing their investments is the sensationalism that the media brings to the process. Investing is a personal project where individual/family goals and objectives must dictate portfolio structure, management strategy, and performance evaluation techniques.
It is not ever a competitive event, and sound advice does not come in flashy sound bytes.
Do most individual investors have difficulty minimizing investment risk in an environment that encourages instant gratification, supports all forms of speculation, and gets off on shortsighted reports, reactions, and achievements?
You bet they do!
Return to Part I. Google: Risk, The Essence Of Investing
Steve Selengut http://www.marketcycleinvestmentmanagement.com/
Author of: "The Brainwashing of the American Investor: The Book that Wall Street Does Not Want YOU to Read", and "A Millionaire's Secret Investment Strategy"
