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Rock, Paper, Scissors?How do most investors decide what mutual funds to buy? Many buy what their brokers or bankers sell them. Others prefer to do it on their own, and rely upon “expert” ratings services in their decision-making. The chart below shows how five different and eminently reputable mutual fund ratings services rate four actual mutual funds (names withheld to protect the foolish).*DFA, Inc. Clearly, there seems to be some meaningful disagreement among these financial powerhouses’ analysis regarding the worth of these funds. If these titans can’t even agree, how is a “do-it-yourselfer” supposed to make a decision? First, the investor must fully understand the strategic investment methodology they desire to use. Then, they must examine how a particular fund fits (or doesn’t) into that particular strategy. Then, if they are using actively managed funds, they must constantly monitor relative performance, style drift, management changes, ...
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The Science of Freaking OutThere is a scientifically measurable human tendency to want to avoid losses more than acquire gains. Behavioral scientists call this Myopic Loss Aversion.* (We call it the average investor.) In fact, it has been shown that the average person is so highly risk adverse that they need odds of 2 to 1 to even accept a 50-50 bet. Said another way, an investor’s pain in experiencing losses is twice as strong as the joy they get for the same amount of gain. That’s the Prospect Theory.*Quarterly Journal of Economics 2/1995All this scientific mumbo-jumbo is fine in the lab or a research report, but the actual trauma is clearly evident when you apply it to real life investing. The reason for this lies in the overall movement of stock prices, which, for the most part, happens to be random, noisy, helter-skelterish movement. For instance, it is a known fact that the majority of long term returns come from less than 10% of all trading months. That means that ov...
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Does God Want You To Be Rich?This unsettling question was found on the cover of TIME magazine’s 9/18/06 edition. As you may have guessed, the article interviewed both sides of the issue. Not surprisingly, many people interviewed who believed God wanted them to be rich, in fact, were rich; and those who believed otherwise, appeared to be at a lower economic level.We are not trying to take sides on this issue, but think it is a good example of how one’s belief structure about money can absolutely affect their real world experience with it. Most people’s views on money probably don’t come directly from their religious background, but rather from their personal or family’s direct or indirect experiences. Have you ever heard any of these expressions about money?Undoubtedly, you heard some of these sayings more than others when you were growing up. In addition to the attitudes the above may imply, your past investment experiences play a huge role in determining ...
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Fee-only vs. Fee-based: The Dirty Little SecretAll of us at Wealth Advisor Group make a big deal about being a fee-only Registered Investment Advisor. We shout it from the rooftops whenever given a chance. If you look at the three-ringed logo in the upper right corner of this letterhead, note that one represents the importance of objectivity in the investment process. We, and virtually all other independent, unbiased experts, believe that fee-only investment management is the supreme way to show a client total objectivity. Not surprisingly, this fee-only method of advisor compensation, and its preference by well-heeled investors, has not gone unnoticed by the big brokers and bankers. For more than a decade, in addition to their normal commission/load structure, they have offered accounts that charge quarterly fees ... and called them fee-based accounts. If you asked them what was the difference between a fee-only and a fee-based account, we’d guess they would say there was little...
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One Bad Apple Can Indeed Spoil the Whole BunchFormer superstar Michael Jackson has made some blunders in his career. Included on this list would be dangling his child out of an upper-story window, and having sleepovers with inappropriately aged bedmates. But for our purposes, his biggest mistake occurred much earlier in his life, when he, Tito, Jermaine and the other two brothers sang the lyrics “One bad apple don’t spoil the whole bunch, girl!”Poor grammar aside, that statement was patently wrong. A single negative occurrence can wreak havoc on the long term reputation or outcome of anyone or anything. Take Bill Buckner. Most baseball fans will remember Bill Buckner not for his years of great hitting, base-stealing or fielding, but for single-handedly losing the 1986 World Series ala a routine Mookie Wilson grounder between his legs. The same thing happens in the political arena. Bill Clinton’s liaisons with you-know-who tarnished forever the many positive acco...
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Conventional Market WisdumbThe wisdom floating around the investment world is vast. If you doubt that statement, just ask almost any highly paid Wall Street guru and they will confirm just how wise they are. All this pent-up brilliance usually filters down to the average investor as a type of conventional wisdom. Remember, a wise man once said that conventional wisdom is information you overhear at a convention. That unfortunately means that your mentor might be wearing a hat with a tassel or a Star Trek costume. Regrettably, much of Wall Street’s conventional wisdom is dead wrong. Here are three examples:1. Higher Growth Forecasts = Higher Stock ReturnsIt makes sense that countries forecasting higher economic growth rates would have better stock market performance than countries with lower forecasted growth. It makes sense, but it is wrong. Our friends at Dimensional Fund Advisors, Inc. performed a study with all investable Emerging Market countries. They ranked those countries ...
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A Coin TossMany investors, both amateur and professional, believe that they can beat common stock market benchmarks, such as the Dow Jones Industrial Average, the S&P 500 Index, etc. All of our country’s top universities offer business degrees in finance, and the top brokers, bankers and mutual fund companies pay their managers top dollar to determine what to buy and sell and when to do it. So naturally, being able to outperform an industry benchmark shouldn’t be too difficult—wouldn’t you agree?Think about how many really good money managers you have heard about in your lifetime. They might be defined as those who have been able to consistently outperform a benchmark for, let’s say, ten years in a row. Well, we all know how great Warren Buffett is supposed to be. Peter Lynch (Fidelity Magellan Fund) was also a well-known money manager for the limited time he was in business (he retired at 43). What about other names? Some less famous but no less impre...
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Indexing Is Not EnoughSometimes when a sophisticated investor first learns about Wealth Advisor Group’s adherence to Modern Portfolio Theory and asset class investing, they will immediately exclaim, “You must be ‘Indexers’”. Translated, that means they think WAG uses all index mutual funds to build our clients’ portfolios. They are wrong. In fact, we are currently using only three index-based fund vehicles to represent three of the 15 specific asset classes our clients can hold in their portfolios. All the other passively managed asset class investment vehicles we use are designed to actually out-perform their index fund counterparts. That is one of the many secrets to our success.You might think that most investors not fortunate enough to have WAG as their advisor would be well counseled to use an index fund approach, as this method has often times out-performed actively managed portfolios. After all, investment legends Peter Lynch (former manager o...
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