Your parents worked for companies that provided Defined Benefit Pension Plans. These plans were funded by the companies, invested by professionals, and provided retirement income for life. The only small catch – the company had to stay in business because its net worth was the ultimate guarantor of a lifetime of benefits for retirees.
What about performance? The company was responsible for contributing new monies to the plan and managing plan assets during your parent’s working years and during their retirement years. Investment performance impacted the company, not your parents. Your parents’ only responsibility was cashing the monthly pension checks that started arriving 30 days after they retired. Continue reading →
Most investors regard stocks as risky investments due to their well-known reputation for volatility. Actually, there are other asset classes that are more volatile. For example, commodities, derivatives and almost any form of leveraged investment.
You should have a high tolerance for risk if you are going to invest in the stock market. What exactly does that mean? It means you are willing to tolerate substantial losses to achieve higher returns. The bottom-line, a high tolerance for risk means you are willing to accept big losses to achieve higher rates of return from your investments. Continue reading →
Individual investors are notorious for being emotionally involved with their money. This may be why money is one of the leading causes of divorce in this country. The two primary emotions are greed and fear.
First, there is greed, which is based on how much money you will make if you are right. Greed causes investors to take substantial amounts of risk in the hope of capturing higher returns. Greed even causes people to invest in scams because they promise exceptional returns. How many scams have you read about that touted 40% to 70% returns? Continue reading →
A high percentage of investors have been conditioned to believe investment performance is determined by their willingness to invest a significant percentage of their retirement assets in the stock market. Consequently, they are exposed to substantial risks when they are in their latter years of accumulating assets for retirement or in their early retirement years with 20 or 30-year investment horizons.
According to an Investor Watchdog (www.InvestorWatchdog.com) survey 64.2% of investors are becoming very concerned about their ability to recover from stock market crashes. Their immediate concern is a crash between now and their retirement dates or within a few years after they retire. They have figured out how the math of falling and rising markets works against them. Bill and Ann Smith, our hypothetical investors, illustrate the problem.
JPMorgan Chase CEO Jamie Dimon said the firm suffered a $2 billion trading loss blaming an “egregious” failure in the firm’s risk management. JP Morgan’s $2 billion dollar blunder has its roots in something called Value at Risk (VAR) which is a measure of how much a company estimates it could lose on a portfolio of securities on 95 percent of days. It’s a model that supposedly measures the boundaries of risk in a bank, a portfolio, or a hedge fund under “normal” market conditions. Its main selling point is that it can simply express risk as a single number or dollar figure and ignore the greater complexities of financial markets. Continue reading →
If you are like a lot of investors you lost 50% of the market value of your assets due to the market meltdown that occurred in late 2007 and 2008 – the Dow dropped more than 7,000 points.
That is very bad news. Even worse news is the number of years it will take to recover those losses. Do the math. You have one dollar and its value drops to fifty cents. You are down 50%. However, you need a 100% rate of return to grow fifty cents back to the original dollar. Your assets have to double from their depressed values.
Unfortunately, that is not all of the bad news. You really need more than 100% to fully recover.
Let’s assume the securities markets average a 20% per year return, which would be exceptional performance over a long period of time. Allowing for some compounding, you should have your dollar back in 4.5 years.
Or, maybe not! You also have to recover 4.5 years of investment expenses which could another 10% or more to your recovery amount. Plus, you need additional return to offset the impact of five years of inflation that reduces the purchasing power of your assets, in particular retirement assets.
You may need a 120% gain to offset a 50% loss.
Your best strategy for reducing future losses and speeding up recovery periods is to make sure your advisor is competent and ethical and he/she provides sophisticated investment services that manage risk as well as pursue performance.
As we approach the end of the year investors will be faced with the critical task of reviewing their 2011 performance and determining whether they should stay with their current advisors.
The most frequent question we receive from investors is “Did my advisor beat the market?” This performance expectation is created by advisors when their sell financial advice and services to investors.
Financial advisors use “beat the market” sales pitches to justify the amount of fees that will be deducted from investor assets. If investors do not have this expectation, they may not be willing to pay the fees.
A high percentage of investors have this expectation, but, is it a realistic expectation?
No, it is not. For example only about 25% of mutual funds beat market returns over longer time periods and the funds are different every year. It is an extremely rare fund that beats the market every year.
Also, what is the market, the S&P 500? This is an index of large capitalization stocks. What if your portfolio is a combination of stocks and bonds? This index is no longer applicable.
In January Investor Watchdog is rolling out six Benchmarks that vary by rate of return expectation and exposure to risk. In the future investors can ask their advisors if they beat their Watchdog Benchmark before and after the deduction of fees.