Tag Archives: speculation

3 Mistakes to Avoid

There are several common mistakes that many investors make when they view their investments.

  1. Comparing your investment results to the S&P 500.
    • This is the biggest error people make.  The returns you should be concerned about are those that you require to meet your objective.  Most people have some objectives that involves money.  It could be a certain level of income, a certain level of wealth, a specific home or other lifestyle objective.  But none of these are tied to a stock market index.  Everyone who wants to beat the S&P 500 as it goes up 50% must realize that they may well go down over 50% if there’s a repeat of 2008.
  2. Viewing the future through a rear view mirror.
    • Too often people will buy last year’s top stock pick or “Hot” mutual fund.  There’s a reason why prospectuses always say “past performance is no guarantee of future results.”  I vividly remember as the year 2000 approached and the Dot.com bubble was peaking.  Money was pouring into internet and tech stocks and delivering spectacular results.  But then the tech bubble burst and those who invested because they believed that those returns would continue lost their savings.  Since then we have seen other bubbles – including the real estate bubble – burst.   People lost their homes and their dreams.  It’s dangerous to view the future by looking backward.
  3. There’s no such thing as a free lunch.
    • If something looks too good to be true, find out what the catch is.  Some are simply scams by crooks who want to sell you worthless securities.  But there are investment products out there that seem to be too good to be true.  But that’s because the people selling these products don’t tell you the downside or won’t explain what can go wrong.  One example were the “structured notes” that were offered with a guarantee against loss.  The problem was that the guarantee was issued by a company that went bankrupt.  Insurance products are sometimes sold without sufficient explanation.

Quite often, the best thing that you can do is to ask the advice of an RIA, an experienced financial advisor, a fiduciary, who is can provide unbiased advice and has the knowledge and experience to know what to look for and what questions to ask.

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The lure and risks of “alternative investments.”

The financial world has been deluged marketing offers from investment firms offering “alternative investments.” “Alts” are non-traditional investments.  They include non-traded REITs, hedge funds and private equity.

The lure of “alts” is summarized in a quote from Financial IQ:

“The 2008 financial crisis scarred investors enough that they’re still seeking new ways to diversify out of stocks and bonds. Meanwhile, investors also are hungry for yield amid persistently low interest rates.”

The problem with “alts” is that they are not well understood.

Many are not liquid – in other words they cannot be sold at a moment’s notice.

In addition, most are not transparent – you can’t always tell what you own because the “alts” managers are secretive, unwilling to reveal their strategy in detail.

Third, the fees charged by “alts” managers are often much higher than those charged by traditional managers.

Many of the “alts” use derivatives which are difficult to understand and can lead to risks that are not obvious. An example are the “guaranteed” structured notes created prior to 2008. When Lehman Brothers collapsed it was revealed that the “guaranteed” notes issued by Lehman were backed by the claims paying ability of a bankrupt company.  People lost millions and learned a painful lesson.

Our philosophy is to invest our money in securities we understand. We always want to know: what’s the worst thing that can happen? If we don’t understand the risk, we don’t invest.  It’s a lesson learned over the years as we keep in mind the first rule of making money:  don’t lose it.

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Would you invest with a billionaire hedge fund manager who made a fortune during the housing crisis?

Watch out.

Many people would jump at the chance and many wealthy people have given John Paulson lots of money to invest for them.

But there’s a downside to trying to get rich via the stock market. The people who “swing for the fences” often strike out.

We found this article in Private Wealth an excellent illustration of this point.

Billionaire John Paulson posted the second-worst trading year of his career in 2014 as a wrong-way energy bet added to declines tied to a failed merger and investments in Fannie Mae and Freddie Mac.

The worst performance was in the Advantage Plus fund, which plummeted 36 percent last year, two people with knowledge of the returns said. …

Paulson & Co.’s performance placed it near the bottom of the hedge fund pack last year as the industry returned a meager 1.4 percent. The manager, who shot to fame after making $15 billion on the housing crisis in 2007, has struggled to regain its footing since 2011 when bets on the U.S. recovery went awry, losing money in all of its main strategies — including a 51 percent tumble in the Advantage Plus fund. Paulson also lost money in investments tied to gold and Europe’s economy, causing assets to dwindle to $19 billion, half the peak in 2011 ….…

Investors in the Advantage fund have lost 48 percent since the end of 2010, while clients in Advantage Plus are down more than 66 percent. ….

At Korving & Company, we are fiduciaries, Paulson is not.  He’s a hedge fund manager who makes big bets.  We don’t bet, we invest.

We manage retirement money. People nearing retirement don’t want to see the money they are saving cut in half. That could force them to work years longer than they planned. People in retirement who saw their savings plummet would have no choice but to reduce their lifestyle.

With that in mind, we do the opposite of Paulson. Our primary directive is keeping what we have and making a fair rate of return on that money by a carefully thought out process of diversification.

Realizing that even the smartest or luckiest investors – like Paulson – can be wrong, we focus on picking good funds but making sure that if any of our fund managers has a bad year, our clients will not have their plans interrupted or their lifestyles affected.

To go back to our baseball analogy, we just want to get on base and do so consistently.

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Benchmarking Inverts the Basics of Investing

The problem with “benchmarking”  – that is measuring your investment performance against market indexes (known as “benchmarks”) – is that it often leads to buying into asset bubbles.

During the tech boom of the last 20th century, billions of dollars went into internet stocks whose values became wildly inflated.  People who participated in this as a way of reaching for high rates of return, found that no one rang a bell when the party was over.  Many lost their retirement savings and saw their 401(k)s devastated.

Certain stocks become wildly popular, industries become wildly popular and investing styles become wildly popular, all of which leads to wildly inflated values.  This almost inevitably leads to financial pain.

But this does not only happen in the stock market.  In the first decade of the 21st century, real estate seemed to be a way of making outsized profits.  Of course, when the housing bubble collapsed, many not only lost money, but their homes.

The focus of serious investors is to align your portfolio with your personal objectives.  The focus should be on long-term – multi-year – performance.  The only benchmark that should concern you is the one you set for yourself.

At Korving & Company we keep our clients grounded and work with them to meet their personal benchmarks.  Contact us to do the same for you.

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Market Commentary October 16, 2004

The Wall Street Journal called yesterday’s stock market action a “fear-fueled frenzy” which is a pretty fair assessment. And it’s in this kind of market in which future fortunes can be made.
Fear causes people to act irrationally. In the words of the poet Rudyard Kipling in his poem titled:

“If”
If you can keep your head when all about you
Are losing theirs and blaming it on you,
….
Yours is the Earth and everything that’s in it,
And—which is more—you’ll be a Man, my son!

Wild swings in the market are almost always caused by panic. Often by people who have made big bets such as hedge funds and other short term players bailing out of money losing trades. This has the effect of making the mom-and-pop investors who are in it for the long term nervous. That’s where keeping your head while others are losing theirs pays off.

Over the longer term markets follow earnings. Consensus estimates for the S&P 500 are expected to rise 11% in 2015. These estimates are subject to change but they indicate a trend that favors the investors who stay the course.

We are in the midst of “earnings season” and here is a representative sampling of companies who reported today:
Goldman Sachs beat estimates by $1.36 per share.
Baxter beat by 5¢
Baker Hughes missed by 12¢
BlackStone missed by 6¢¢
Delta Air beat by 2¢
Fairchild Semiconductor beat by 7¢
Fifth Third Bancorp missed by 4¢
Procter & Gamble beat by 7¢
Briggs & Stratton beat by 17¢

We are not recommending the purchase or sale of these stocks, simply noting that six out of nine major companies are actually reporting better earnings than analysts expected. When will the current panic pass? We don’t pretend to tell you. But we are confident if we do our job and create well diversified portfolios we’ll do well over time.

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What do you do when the market drops 300 points?

Yesterday scared a lot of people.  And when the July brokerage statements arrive, many people will not want to open them.  It’s not been a good month for stocks.

When there’s a sudden drop in the market, one that makes people take notice, we always wonder what’s going to happen next.  Is it the beginning of a steep decline, perhaps a Bear Market?  Or is an opportunity to buy stocks on sale?  A Blue Light Special?

The answer is: nobody knows.  Anyone who pretends to know is lying.

If you have a properly constructed portfolio, what happens next won’t bother you.

By a properly constructed portfolio we mean a portfolio that’s designed to be robust, that’s properly diversified and one that is designed for your risk tolerance.

When the stock market is going up, the value of that part of your portfolio devoted to stocks increases in value.  And while you may think that’s a good thing, what it’s doing is increasing the portion of your investments to stocks which are the riskiest part of your portfolio.  Over time, during a Bull Market, your portfolio is becoming riskier and riskier.  Unless you take active measures to bring your investments back to your original asset allocation – a fancy way of saying the portion of your portfolio that’s devoted to stocks and bonds – when the market takes a dive, your portfolio will decline more than you want.

If yesterday’s drop felt more like a drop-kick, you own too much stock. It’s time to to re-evaluate your risk tolerance. Talk to your financial advisor.

So, to answer our original question: What do you do when the market drops 300 points?  If you had a portfolio that’s designed with you and your future in mind, the answer is nothing.  On the other hand, if it caused you to panic, call us and let’s talk.

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Warren Buffett and You.

An interesting, and instructive, article in Investment Advisor magazine made some great points about the Buffett legend.  Like most legends, it’s part truth and part myth.  In Buffett’s case there is more myth than truth.

Don’t get me wrong, Buffett is one of the world’s richest men, and a famous investor.  But it’s not a rags-to-riches story.  Son of a Congressman, young Warren had an elite education.  He bought a farm while in high school, not something you can do with the income from a paper route.

The legend is that he’s just a folksy stock picker with a buy-and-hold strategy.  The truth is that he made his first millions as a hedge fund manager, raking off 25% of the profits over a 6% hurdle rate.  His most famous investments came from bailing out firms in distress like GE and GEICO when they were in financial trouble.  Buffett got sweetheart deals from them because he had them by the throat and could lend them billions of dollars when they needed it fast.

That’s the edge that Buffett has that none of my other readers have. (Hi Warren)

One observer of Buffett wrote:

By oversimplifying this glorified investor named Buffett the general public gets the false perception that portfolio management is so easy a caveman can do it. And so we see commercials with babies trading from their cribs and middle aged men trading an account in their free time.

If you’re not Warren Buffett, what should your objective be with your investments?  Think about your goals.  See if they are reasonable.  Determine what it will take to get you there.  If you need help with this, get the advice of a professional.  If you are fortunate enough to have already reached your financial goals, decide what it takes to make sure you don’t lose it.

And then, unless you are determined to make a career out of investment management, hire a competent, credentialed, experienced, fee-only Registered Investment Advisor to manage your portfolio for you.  In other words, call Korving & Company – today – and make an appointment.

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Market Myth #2: It’s all about beating the market.

For many amateur investors the object is to beat the market.  They are abetted in this belief by the many magazines and newsletters that make the market the benchmark of what a successful investor should emulate.  People spend hours scouring the media looking for stock tips and investing ideas as if investing was a sport, like horse race, where the object is to beat the others to the finish line.

The fact is that “beating the market” does not address any individual’s actual financial goals.  It’s a meaningless statistic.  And it’s dangerous.

The fact is that most professional investors don’t beat the market on a consistent basis.  Even index funds, designed to replicate the market, don’t actually beat the market.  At best they provide market rates of return minus a fee.  Attempting to beat the market exposes the investor to more risk than is prudent.

Your portfolio should be built around your needs and consistent with your risk tolerance.

What does this mean?  Your portfolio should provide a return that’s keeping you ahead of the cost of living, that allows you to retire in comfort, and is conservative enough that you will not be scared out of the market during the inevitable corrections.

Want to create a portfolio that’s right for you?  Contact us.

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Market myth #1: the stock market can make you rich.

This is one of a series of posts about common market myths that can be dangerous to your wealth.

The market is rarely the place where fortunes are made.  Real people get rich by creating and running great companies.  Bill Gates became the richest man by building and running Microsoft.  Steve Jobs the same way.  The Walton Family, ditto.

In the less rarefied world of multi-millionaires, millionaires and semi-millionaires the same thing is true.  People get rich (or well-to-do) by starting a business, studying and becoming a professional or just working for a living and saving part of what they earn.

This is not to disparage the market as a  tool for protecting  wealth, maintaining purchasing power, living well in retirement and getting a fair rate of return on your money.  But the idea that you can get rich by trading stocks is a myth that can actually destroy your financial well-being.

One of the best ways of avoiding the temptation to use the market as a “casino,” a place where you can “win the lottery” is to turn to a professional investment advisor.  Someone who knows what’s possible and what’s not.  Someone who is in the business of getting you a fair rate of return on your money while minimizing the risk that you will lose it.  An independent, fee only RIA is someone who will not try to sell you one the latest investment fad that the  wire-houses are selling, but who will act in your best interest, because that’s in his best interest.

Have a question about the markets?  Ask us.

 

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Avoiding the Housing Trap in Retirement

Homes are a money pit. This morning the HVAC repairman showed up to fix the broken attic fan. Painters are coming next week. The insurance bill on the home is due soon. The landscaping needs some work. Let’s not forget real estate taxes and the mortgage payment.

Many people think of their home as a financial asset. Most people thought real estate was a safe financial asset. People were flipping houses for fun and profit. Then 2008 came along and we learned a whole new set of terms, like “liar loans” and “short sale.”

What does this have to do with retirement? Just this: many people are over-spending on their dream home or holding on to costly vacation homes. There is a term for this: being “house poor.” It describes the homeowners who spend too much of their income on housing costs.  How much is too much?  If it’s nearing 40% it’s definitely too much.

We won’t go into the reasons for this; they are well-known. The answer is to either make more money or to get rid of the money pit. It may be a very difficult emotional decision, but over the long-term, the financial markets have done better than the housing market. Another benefit is that the financial markets are liquid while your home is not,  sometimes taking a year or more to sell.

We are big believers in home ownership. But in our experience a home is not a financial asset that is used in retirement. In most cases the home does not become a financial asset until the owner gets too old and has to move into a retirement community or a nursing home. By that time, retirement is nearing its end.

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