"Lost decade" worse for bears than bulls

If only we had seen it coming, we could have socked our money safely into "bear funds" and made some serious returns over the last decade, right?

Sadly, no.  "Bear funds" were the worst performing funds over the last ten years (down 10% on average) and over the last five years (down 13% on average), according to Morningstar.

Why?  Because market timing doesn't work, "bear funds" are egregiously expensive, and because it's dangerous to bet against capitalism.

 

Five risk tolerance myths

A recent article debunks several risk tolerance myths such as "people all have a high risk tolerance when the market is going up but when the market starts to crash their risk tolerance suddenly goes to zero," and "asset allocation depends on the investor's risk tolerance only and this will ultimately determine whether the investor succeeds or fails in meeting his or her investment objectives."

Read the whole story

How not to win a stock-picking contest

I recently received an email from a high school student asking for advice on winning a stock-picking contest.

Here's my reply:

Dear <name changed>, 

Thanks for your e-mail.

Winning a stock-picking contest and following a sound investment strategy are the complete opposites of one another.

You mention Las Vegas which is exactly the strategy you'll need (along with a whole lot of luck) to win the stock-picking contest.
Pick a very small number (one perhaps) of volatile, risky, small-cap stocks and "let it ride."
Note:  I would never recommend this as a strategy to anyone investing any real money.
A sound investment strategy would consist of hundreds if not thousands of stocks, bonds, and perhaps other securities, resulting
in an elimination of "diversifiable risk." This essentially represents the difference between investing and gambling.
There is a very easy and cost-effective way to achieve this, namely by buying and holding a small number of index funds.
So, have fun in the contest but don't confuse the experience (bad or good) with skill.
Whoever wins will be determined by luck, nothing more.

Kindest Regards,
John

As a sidenote, I consider it criminal activity when schools and teachers sponsor such contests under the guise of "educating the students on investing and the financial markets."

Take the kids on a field trip to Las Vegas instead.

 

Memories from an old e-mail

I came across an old email (dated February 2009) from a one-time planning client who didn't agree with my investment philosophy (it's very rare that people pay me for my advice and then don't take it but it occasionally happens).

John,

I trust that all is well with you and yours.   
<Names changed> are doing well in <name changed> and just bought a new deck boat.  (Someone has to spend money these days!)

 Are you still recommending the same slice of ETF's, etc.?  

 I have looked at your recommendations several times but have yet to act.  I am still at the same place, thinking the market is going to 5000 or below.  I am still in treasuries and short ETF's with some funds in a bullish US dollar ETF and some in a short of the Austrailian dollar.  They are doing OK.  I am probably going to buy some more of the short ETF's today and some <gold ETF> and <silver ETF>.
 
I think things are much worse than when we first met and we have another few trillion (a lot of boats) of debt with nothing to show for it.
 
I firmly believe in your method of diversification.  However, there is no short side options.  Therefore, I will be watching when to jump in.
 
Come up and go fishing.
 
Regards,  <name changed>

Well, since he thought the market was going to 5,000, I assume he's still "watching to jump in."  Ouch.
Note: nothing in this post should be considered a recommendation or solicitation to buy or sell any security.