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Is It Soup Yet?Have we bottomed? Is the worst over? Has the bull market started yet? No matter how you say it,many investors are thinking, or at least hoping, that the market will go no lower than it did in midNovember. The above chart shows the S&P 500 Index from its high in October 2007 until the end of2008. We can see that there have been five distinct "bottoms" or new lows, since peaking in late2007. Notice that some of the bottoms are literally single day events, while others are double ortriple bottoms that take several weeks or months to occur. With each new low, the market hasbounced back up, with gains of 10-20% or more, only to come down and make a new low.The point of this graph is not to bring back miserable memories. Rather, it is to show the difficulty in"calling" market bottoms. We may not know for several more months whether the November 2008low is in fact the bottom or not. If it turns out that November was the low, then chances are, by thetime ...
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They Shoot Horses Don't They? Despite the fact that global Capitalism is more prevalent today then ever before, it does have itsdrawbacks. For starters, it doesn't have empathy. It doesn't feel sorry for those negatively affectedby it. You're in a recession? Tough! Your company's gone bankrupt? Big deal! Can't feed yourkids? Not its problem! Capitalism is similar to the law of the jungle -- survival of the fittest. Whensupply and demand line up against each other, Capitalism really doesn't care who wins. The weakbecome dust, and the strong continue onward until a future time when they may also hit theground. With Capitalism, it's all in a day's work, and there are no emotional repercussionsregardless of the outcome.With humans, it's a different story. We simply aren't fond of economic hardships, or losing our jobs,or not providing for our families. Consequently, we empower our government to attempt to tweakCapitalism so that we can thrive fro...
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Pachyderms & AssesElephants and donkeys. Republicans and Democrats. No matter whatyou call them or what your affiliation, the conventions and big election arecoming soon. In less than four months, we will all know who our nextPresident will be.This subject may make you somewhat nervous, just in case the currentmarket conditions haven't made you nervous enough. It appears to be aclose race, with the Democratic candidate having as much chance to winas the Republican. Conventional wisdom says that a DemocraticPresident poses some dangers to the stock market and investing ingeneral. Whether correct or not, many see Democrats as "tax andspenders", while viewing Republicans as champions of tax cuts.Republicans are known as pro big business, whereas Democrats are seen as pro-regulatory andpotentially anti stock market. This line of reasoning says that, simply put, a Democrat in the WhiteHouse is a scary proposition for the average investor.Fortunately, as we have discussed i...
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Bombs AwayBy the time you see the flash and mushroom cloud, it’s probably too late to run from an atom bomb. Recessions and bear markets aren’t much different. When you realize you are actually in one, the damage is already done. By that time, you are undoubtedly closer to the bottom, and it is historically a good time to be in the market.Bear markets are defined as 20% retracements from market highs. Using that formula, the broad U.S. market has not quite become an official bear as of the end of the quarter. However, that does not alleviate the unpleasantness of watching the monthly declines on your account statement. The first quarter of 2008 was the worst in the last 5 ½ years. After hitting a market high last October, virtually every month has been down.The only thing worse than the stock market has been the news that has accompanied it. The bloodletting of the over-inflated US single family housing market, the frozen-credit mess that started with unregulated sub...
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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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