Should I wait until the market comes back?

The question I am asked most frequently these days is, "Should I wait for the market to go back up before I sell the investment I am in and move it into something more appropriate?" As you can imagine, this question generally revolves around selling out of a traditional portfolio to move it into a Snider Method portfolio -- but the answer holds true regardless of the investment.

There is absolutely no reason to wait until the market goes back up to exchange one asset you are holding, in hopes of capital appreciation, for another similar asset. Let me give you an example to illustrate this point:

Suppose you started out with an investment in a diversified portfolio of mutual funds that have a cost basis of $200,000. The market has dropped 50% and your mutual funds have likewise dropped in value. So today, they are worth $100,000. If the market goes up 10% from here, you'll earn 10% of $100,000, or $10,000. At this point, the $200,000 you paid for the mutual funds is irrelevant. The market doesn't know how much you paid for those funds and it doesn't care.

Now imagine you sold those mutual funds for $100,000 in cash. You use that $100,000 to purchase $100,000 worth of a different investment. If the new investment goes up 10%, you will earn 10% of $100,000, or the same $10,000 you would have earned in the previous investment. So long as you are switching to an investment which has a similar potential for gains, nothing is lost by switching. You earn the exact same dollars, given the same returns, as you would have in the original investment.

Let me repeat that -- you are not locking in losses so long as you are exchanging one capital appreciation asset for another that has a similar opportunity for profit.

This is not the case with cash flow investments. The key characteristics of cash flow investments are: 1) Cash flow is money that comes to you while you own an asset; and 2) The cash flow is generally (though not always) tied to the face value of the assets or the amount invested, not the market value.

Suppose you have bought $200,000 worth of actual bonds paying 5%, a cash flow investment. The cash flow from these bonds is $10,000 a year, which is why you bought them. Imagine the value of the bonds fell by 50% and are now worth $100,000. If you sell the bonds for $100,000 and use the $100,000 to buy a different cash flow asset, paying the same 5%, the maximum cash flow from that investment is now $5000. You have just permanently reduced the income potential of the portfolio by half, unless you can find an investment with a yield high enough to make up for the loss of principal.

If you are like many of the people I speak with, you may have this concept of exchange confused with the advice that says never sell when the market is down. Sell is different than exchange. Sell means selling out of the assets to move into something which is much more conservative and has less potential for gain -- like cash -- in which case, you definitely are locking in losses.

So, to make it easy, the rules are:

1. If you are exchanging a capital appreciation asset, for another capital appreciation asset with similar potential for gains, nothing is lost.

2. If you are exchanging a capital appreciation asset for a cash flow asset with yield potential similar to the capital appreciation potential, nothing is lost by switching.

3. If you sell a capital appreciation investment to move it to something with a much lower potential for gain - like cash equivalents or U.S. Treasuries - you are locking in losses and crippling your portfolio.

4. If you sell a cash flow investment  - like a bond or a Snider Method position - for less than it's cost basis, you are permanently reducing the income potential of the portfolio.

My final caution is to be clear about why you are selling an investment. All investments, by definition, are cyclical. Selling because an investment is currently underperforming its long-term average is never a good decision. No investment can be above average all the time. Again, by definition, average means that sometimes it is below and sometimes above. This is not Lake Wobegon where all the children are above average.

Remember that investing is a probability game. The key to successful investing is to select investments, which given their probabilities and characteristics, are the closest match for your investment objective, time horizon and risk tolerance. Then sit back and be patient.

On the other hand, what many of you are realizing, is that you are not in investments properly matched to your investment objective or your time horizon. Your objective is retirement income and you're investing in capital appreciation investments. When that is the case, the time to switch is the moment you realize you are in the wrong investment.

If you would like to learn more about how cash flow investing might be able to help you meet your objectives, I would invite you to attend one of our free, online Investor Briefings. You can find the details on our corporate website at snideradvisors.com.

The opinions expressed should not be construed as financial, legal, tax or other advice and are provided for informational purposes only. All investments involve risk including possible loss of principal. Investment objectives, risks and other information are contained in the Snider Investment Method Owner's Manual; read and consider them carefully before investing. More information can be found on our website or by calling 1-888-6SNIDER. Past performance is not indicative of future results.

The mother of all reverse compounding problems

The only proven way to achieve a passive double-digit yield to replace your income is to own businesses – either directly or indirectly through common stock ownership. But this creates a challenge.

The chart [at left] shows each of the bear market declines since the end of World War One. We are in the tenth decade and there have been twenty bear market drops of 20% or more –about one every five years. If you want to get even more specific, it is about sixteen months out of every sixty that we spend in bear markets. Of the twenty bear markets since WWI, eight of them have had a drop of more than 40% in the S&P.

It is absolutely true stocks go up over the long run. But your time horizon isn’t the long run when your objective is income replacement. You have bills to pay each and every month. When you are living off your portfolio, in order to pay those bills each month, you must sell some of the stocks and bonds in the portfolio. Based on historical market data, those sales will be at a loss a large percentage of the time. These regular losses create the mother of all reverse compounding problems.

You know about the power of compounding right? Which would you rather have? A million dollars or a penny doubled every day for thirty days?

Miraculously, a penny doubled thirty times is $5,368,709.12. But the bad news is it works the opposite in reverse. If you sell assets at a loss, you get reverse compounding. If you have a $100K stock portfolio and it loses 50% of its value, how much does it have to go up to get back to $100K? 100%! It has to double. That is reverse compounding.

The challenge is approximately one out every five years in the stock market is a down year. You have to sell off assets every year in order to eat. So, in order to live off the portfolio, you are going to have to sell stuff at a loss on a fairly regular basis. If those losses occur in the wrong order, it dramatically increases the chances of what academics call retirement ruin – a nice euphemism for running out of money before you run out of breath. This is known as the “sequencing of returns problem.”

Take, for example, the 17 year period from 1987 to 2003. The average return was 13.47%. Assume a portfolio of 100,000 taking $10,000 a year adjusted for inflation by 4% over those 17 years. Depending on the sequence of returns which produce the 13.5% average, the ending portfolio balance could be as high as $76K or as low as negative $187K! That is a big swing and obviously meaningful to your situation late in life.

Lesson Four: To avoid the sequencing of returns problem and negative compounding, an investor must avoid permanent losses of capital at all costs. Permanent losses of capital occur when assets are sold at a loss.

The preceding is an excerpt from my newest special report: How to not just survive, but thrive, in turbulent financial markets. Feel free to download the report and share it with anyone you think would benefit from the information.

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Disclaimer: Snider Advisors makes no representation that the information and opinions expressed are accurate, complete or current. The opinions expressed should not be construed as financial, legal, tax or other advice and are provided for informational purposes only. This article is not a complete discussion of the benefits and risks of the Snider Investment Method®. For a complete discussion, read the Snider Investment Method® Owner's Manual, available by calling 866-9-SNIDER (866-976-4337). Please read and consider carefully before investing. All investments are subject to risk, including possible loss of principal.

Great Historical Perspective on Recent Market Action

Here is a really useful histogram of the annual return of the S&P 500 going back to 1825. I found it on the web in a number of places. All attribute the chart to Value Square Asset Management but I am afraid I have been unable to find the original source document. (Click on the chart to get the full size version).

This is our fifth bear market in twenty years. Contrary to public opinion, business cycles have existed since businesses have existed and they will continue to cycle between boom and bust in spite of government's best efforts to control or eliminate them. If that is true, then ipso facto, capital appreciation investing cannot work.

Just follow through the logic with me. I need double digit returns to pay myself, pay Uncle Sam and keep up with inflation in retirement. Owning businesses, either directly or indirectly through the stock market is the only proven way to get double digit returns over long periods of time. But about every five years, the business cycle takes the market down with it. If I have to sell in order to create income to live and with capital appreciation, I have to sell in order to realize profits, which means in order to pay my bills I have to sell at a loss, capital appreciation cannot work. Let me repeat. It cannot work.

And yet, that is what we continue to be sold. It is as absolutely as simple as that and it doesn’t take a rocket scientist, Harvard MBA or Ph.D. in finance to see that is true. The problem is quite simply that our world has changed dramatically in the very short time since the 1980’s and our investments haven’t. It is time to change our paradigm. I don’t know how to put it any more simply than that.
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Snider Advisors makes no representation that the information and opinions expressed are accurate, complete or current. The opinions expressed should not be construed as financial, legal, tax or other advice and are provided for informational purposes only. This article is not a complete discussion of the benefits and risks of the Snider Investment Method®. For a complete discussion, read the Snider Investment Method® Owner's Manual, available by calling 888-6SNIDER. Please read and consider carefully before investing. All investments, including the Snider Investment Method® are subject to risk, including possible loss of principal. Income is objective and not a guarantee. Dollar cost averaging does not guarantee you will not experience capital losses.

We don't have enough time to buy and hold

Market commentator and analyst Barry Ritholtz has recently posted on his blog about the big divide between the pundits and the public over the state of our economy. Or, as he puts it, “the disconnect between reality and the Pervasive Pollyannas of Prosperity.” Most of the analysts you see on CNBC, he says, are touting the strength of the economy, or at least its potential to turn around soon. The public, he says, sees the situation very differently – they’re expecting more rough seas ahead.

Barry says the pundits have just gotten ridiculous:

How absurd has the Panglossian cheerleading become? On my pal Larry Kudlow's show last night, several of Candide's descendants talked about how great stocks are if you hold them for 30 years. That's right, the holding period for equities according to this crowd is three decades. Of course, this means every pullback is a buying opportunity. Words such as these can only be spoken by someone who has never worked on a trading desk or managed assets professionally -- or if they did, they lost most of their clients' money.

Barry illustrates very clearly here the problem with the strategy of buy-and-hold. It’s true that the U.S. stock market has returned on average 10-12% annually over long periods of time. To take advantage of the long-term growth, you’d need to buy when the market is down. To a buy-and-hold investor, the current market downturn is a perfect buying opportunity.

But investing isn't just about knowing when to buy. The problem with buy-and-hold isn’t the “buy” part. It’s the “hold.” To get the long-term 10-12% return, you potentially have to hold for a really, really long time.

The Wall Street Journal is calling this “The Lost Decade.” From Dec. 31, 1999 to December 31, 2007, the return of the U.S. stock market was practically zero (1469.25 in 1999; 1468.36 in 2007). Here we are in the middle of 2008, and the S&P is below 1300. For us to get back to the 10-12% average, we would have to experience a very long period of above-average returns. The question is, how long? Nobody knows. It could take 10, 20 years or longer. History tells us there have been 20-year periods in the past where the average return of the stock market was less than 2%.

If you’re in your 50s, your retirement time horizon may be 40 years (10 years pre-retirement; 30 years in retirement). 20 years is a long time to wait for the market to even itself out.

That’s why buy and hold doesn’t work for most of us. We don’t have time for it!

This is precisely why I am a cash-flow investor. My goal is to exchange the long-term 10-12% annual returns of the stock market for something more tangible in the short-term. If I focus on generating cash in the short run, the ups and downs of the market over time don't tend to bother me as much.

I admit, investing in the stock market this way is a bit of a paradigm shift. You have to think of your stocks not as an appreciating asset, but as a means to an end. Once you view your stocks this way, it’s a little easier to endure the market slowdowns. 

SOURCES:

1. Ritholtz, Barry. "Persuasive Pollyannas of Prosperity," The Big Picture, 02 July 2008. http://bigpicture.typepad.com/comments/2008/07/more-on-the-pub.html

2. Browning, E.S. "Stocks Tarnished By 'Lost Decade'," The Wall Street Journal. (accessed 02 July 2008)

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Kim Snider is the President and Founder of Snider Advisors, an SEC Registered Investment Advisor, focused on teaching individual investors a sensible, long-term investment approach focused on maximizing cash flow. For more information on Snider Advisors or the Snider Investment Method and how to stop enriching your investment advisors at your expense, please visit snideradvisors.com. Her book, How to Be the Family CFO: Four Simple Steps To Put Your Financial House in Order, will be in bookstores October 1, 2008.

Snider Advisors makes no representation that the information and opinions expressed are accurate, complete or current. The opinions expressed should not be construed as financial, legal, tax, or other advice and are provided for informational purposes only. Call 888-6SNIDER to request the Snider Investment Method® Owner's Manual, which includes a description of the Snider Investment Method, investment objectives, risks, suitability and other information. Please read and consider carefully before investing. All investments, including the Snider Investment Method™ are subject to risk, including possible loss of principal. Click here for performance statistics of the Snider Investment Method and a discussion of yield vs. total return.

Guest column: The "R" Word

I am traveling this week, so I decided to take a bit of a shortcut and run a guest column by one of my favorite writers, Nick Murray. Many people have been writing me in recent weeks about the possibility of a recession and what changes they should make to their portfolio.

We believe you never make changes to your portfolio based on what you think the market or economy will do. You only have a 50-50 chance of being right. For every economist, journalist or Chief Market Strategist who says Armageddon is coming, there is another one who says the exact opposite. Or, as the Nobel prize winning economist Paul Samuelson said, "The stock market has forecast nine of the last five recessions."

Personally, I have no opinion about whether we will go into recession or not or, if we do, how deep or long-lasting it will be. I have no control over it and I wouldn't do anything different if I knew the answer. So for me, there is no point wasting brain space on it.

Nonetheless, I thought this piece by Nick Murray might give you a different viewpoint than the one so prevalent in the press these days. Food for thought …

	The "R" Word, by Nick Murray (Originally published in Nick Murray Interactive - Vol. 8, Issue 2, February, 2008 As a measure of how utterly debased and stupid the rhetoric about the alleged imminence of a recession has been of late, nothing compares to a comment mined from an AP wire "story" that appeared in mid-January. In it, the chief market strategist for a foreign financial institution which shall be nameless – a chap who apparently has no background in economics, and/or to whom English is a second language – opined that "it's possible that the recession may only last one quarter." And you know that this is an accurate quote, because you know that neither I nor anyone else could make it up. Herewith, some rational observations about the economic phenomenon called "recession." The first, as in any rational discourse (thereby excluding all journalism on the subject), is of course a definition of the term: a method of calibrating it, which is a bit different from a method of screaming apocalyptically about it in the cadences of Chicken Little. A recession, as defined by the National Bureau of Economic Research – and therefore by anyone who has actually taken an entry-level college course in basic economics, as opposed to financial reporters who are former weather girls of either gender from a television station in Ames, Iowa – is two consecutive quarters of negative GDP growth. That is, a recession is a minimum six-month period in which the economy actually contracts. A "one-quarter recession" is therefore – like a water landing, a short-sleeve dress shirt, or a new tradition – actually an oxymoron. (A "growth recession," on the other hand, is a period of economic growth that is slower than the previous period of economic growth. Since the latter is nowhere near scary enough for use by former weather girls of either gender, journalism has adopted the term "growth recession.") The National Bureau of Economic Research will also be happy to disclose to you that there have been ten such episodes since the end of World War II. The average lasted approximately ten and a half months, and carried the economy down slightly less than two percent. (Over the last quarter century, as the economy has deepened, and our monetary tools for fighting slowdowns have improved, the time lapse between recessions has lengthened, and both their duration and depth have moderated. Indeed, since November 1982, the economy has only been in recession for 16 months out of about 300. But never mind that. It smacks too much of good news – or, as it is sometimes referred to, "truth.") A ten-month, two percent contraction on an average of every six years suggests that recessions punctuate – on average – economic expansions occupying the other 60-odd months. Forgive me, but this seems to me to be a very small price to pay for an accretion of national wealth which is ongoing, and which has produced the wealthiest society that ever existed on the earth. It is, in other words, nothing more or less than a part of the cycle, and the net effect of that cycle is the unprecedented betterment of humankind. (Why, even Americans on food stamps have 44-inch plasma TVs and are morbidly obese. Think of it: this society is so rich that even its poorest members eat too much! But I digress.) Once again: there either is or is not going to be a recession in this country. (As I write, the Chairman of the Federal Reserve is expressing to a congressional committee the Board's opinion that there is not, but what does he know?) The Fed has unequivocally declared its intention to fight such an occurrence with all the monetary weapons at its command. And both the legislative and executive branches have expressed strong interest in implementing some sort of fiscal stimulus. This is in keeping with the obvious truism that the more advance warning a recession gives you – as opposed to the last one, spawned by the sudden bursting of the tech bubble – the easier it becomes to fight it off. If there is a recession, on average the equity market – being a discounter of the future, rather than a reflector of the moment – will turn up about halfway through it, while journalism is trumpeting each new negative statistic to the skies as evidence of deepening Armageddon. Thus, the people who panicked out in fear of a looming recession will – by the time it's officially declared over – have to buy their portfolios back at higher prices than those at which they sold. With the obvious exception of the deity Himself, the stock market is the universe's ultimate ironist. And if there is a recession – and I, along with Dr. Bernanke, hereby repeat that I don't believe there will be – you may rest assured that its proximate cause will not have been oil, or subprime mortgage write-downs, or any of the usual suspects, all of which are quite adequately discounted in a 1350 S&P. It will, I'm perfectly convinced, have been journalism. I expect journalism to be alarmist, declinist, economically illiterate, repetitive, stupid and single-mindedly devoted to demonstrating that not only is the glass half-empty, but that this time it's irreparably shattered into a million pieces. But journalism's "coverage" of the economy and the markets in the last several months has been something altogether new in my 40-year career. It's made Chicken Little look like Pollyanna. And it may yet succeed in frightening the whole country into sitting down hard on its wallet. Thus, if we do have a recession, I hope journalism will have the minimal grace to report it as what it will surely be: a self-fulfilling prophecy. © 2008 Nick Murray. Reprinted with permission. Nick's lovely little book for investors, Simple Wealth, Inevitable Wealth, is available on his website www.nickmurray.com, click on "Books." We warmly recommend it.)

Kim Snider Financial Communications makes no representation that the information and opinions expressed are accurate, complete or current. The opinions expressed should not be construed as financial, legal, tax, or other advice and are provided for informational purposes only. Call 866-952-0100 to request the Snider Investment Method™ Owner's Manual, which includes a description of the Snider Investment Method, investment objectives, risks, suitability and other information. Please read and consider carefully before investing. All investments are subject to risk, including possible loss of principal. Individual results may vary. Individual performance depends on individual savings, investment time frame and market conditions. Diversification does not ensure a profit or protect against loss in a declining market.

Your time horizon may be longer than you think

When choosing your investments, there are four things to consider:

 

1. Your investment objectives

2. Your risk tolerance

3. Your time horizon

4. Your temperament

 

Once you've chosen an investment that satisfies these criteria, you shouldn't make major changes to it unless one of those criteria changes. I've written a lot on my blog about several of these criteria, but today I want to focus on No. 3: your time horizon.

 

Many of us were taught that there are two phases to investing: The accumulation phase, when you can take more risk by investing primarily in equities, and the income phase, when you put more of your assets into lower risk investments such as bonds. The thinking is that your primary time horizon for investing is up until the day you retire; then you switch to living off what you've built.

 

This line of thinking is a bunch of bunk. Your time horizon for growth doesn't end when you retire; it continues for the rest of your life. (And income investing and growth investing don't have to be mutually exclusive; income reinvested is growth, but that's a topic for another day.)

 

I got to thinking again about our time horizon last week at one of our Snider Method information sessions. I had just described our investment method as a long-term approach when an audience member asked, "But I'm almost 70, and I'm already retired. Shouldn't I focus more on the short term?"

 

I told him that even 70-year-olds have a long-term investment horizon. The reason is life expectancy. If your goal is to sustain your standard of living for the rest of your life, you need to look at how long you can expect to live.

 

A recent article in USA Today detailed the life expectancy of men, women and couples who planned to retire this year at age 62. Citing data from the American Academy of Actuaries, the article said that the joint life expectancy for a 62-year-old couple is 90.7 years. There’s a 58% chance that one of them will live to age 90, and a 29% chance that one will reach 95.

 

This means that my 70-year-old guest has at about a 20-25 year time horizon for his investments -- maybe even longer. His challenge is to invest so his portfolio can sustain his standard of living for that long, taking into account inflation and the rising costs of health care.

 

Considering that the cost of living increases an average of 3.5% a year, and health care costs are rising at twice that rate, his rate of return needs to be higher than that obtained by the bond-heavy portfolio usually recommended to someone in his age group. The only way to generate that kind of return is to have a significant portion of his portfolio invested in stocks.

 

I'm sure most 70-year-olds would balk at the idea of being heavily invested in stocks. Too much risk, they'd say. But market risk is more of a concern in the short term. For the long-term investor holding a diversified portfolio, stock market risk is much less of a concern.

 

The stock market has historically been a great creator of wealth and protector of purchasing power for the investor holding a portfolio of America's greatest companies over long periods of time. Many investors don't realize that their time horizons are much longer than they think -- even my new 70-year-old friend who's already enjoying retirement.

 

SOURCE: Sandra Block, "Boomers' Eagerness to Retire Could Cost Them," USA Today, Jan. 14, 2008. http://www.usatoday.com/money/perfi/ retirement/2008-01-13-turning-62-cover_N.htm

 

Kim Snider Financial Communications makes no representation that the information and opinions expressed are accurate, complete or current. The opinions expressed should not be construed as financial, legal, tax, or other advice and are provided for informational purposes only. Call 866-952-0100 to request the Snider Investment Method™ Owner's Manual, which includes a description of the Snider Investment Method, investment objectives, risks, suitability and other information. Please read and consider carefully before investing. All investments, including the Snider Investment Method™ are subject to risk, including possible loss of principal. Growth refers to growth of portfolio income, not necessarily growth of net asset value. Growth assumes some portion of income is reinvested. Yields do not include unrealized losses or gains.

The Performance Paradox - Fear - (Part 1)

When the markets re-opened on September 17, 2001, the Dow was down, at one point, 850 points and the S&P lost 5% of its value. I remember remarking to my husband (boyfriend at the time) that I felt as if I was moving through Jell-O. Much of what we thought we knew about our world had just gone out the window. No one knew what was coming next. Would there be more attacks? Was this just the beginning? And even if there weren't, how would the economy withstand such an unprecedented disruption?

 

That week, a number of our clients called us. Some just wanted to talk. Others wanted to know what to do. Should they continue with the Snider Investment Method as if nothing has happened? Should they sell their Snider Method positions? Should they liquidate their other stock market holdings?

 

Our response, as it always is, was to stay the course. There was no reason to alter the strategy or do anything different. After all, our investment objectives, tolerance for risk or time horizon did not change when those airplanes slammed into the World Trade Center. I put together a 60 second radio spot that aired on local radio before the markets reopened which told people we would be buyers of stock when the markets reopened.

 

Many people, clients and otherwise, thought we were nuts. Some called to say they were dumping their portfolios. We advised strongly against it, but it was their money. They could do what they wanted.

 

Those who dumped their portfolios did so out of fear and are classic examples of one side of what I have come to call the Performance Paradox. The Performance Paradox is that the more we react to the short term performance of our portfolio, either out of fear or greed, the worse our long-term performance will be.

 

The person who invests from a base of fear, in other words is so afraid of market losses or is so obsessed with short term performance, that he sells every time an investment goes down creates a pattern of turning temporary losses in value into permanent losses of capital. Do this over and over again and you will continually turn winners into losers.

 

What is the answer?

 

To be a successful investor, you must be an optimist. You must recognize and internalize that we live in the greatest, most transparent economy in the world. There will be downturns and tough times - no question. All of us have a tendency, especially as we get older, to think the world is going to hell in a hand basket.

 

And yet, we also know that ten years after any economic disruption - whether it be the Great Depression, the 1987 crash, the currency crisis of the late 1990s, September 11th or whatever - we can look back and we will not wish we had sold. Instead we will wish we had invested everything we had at the time.

 

This is not to say that investing is risk-free and that even the most optimistic among us won't go through periods of doubt. By definition, we will experience severe declines periodically in the future. Investing in the stock market is a winning strategy, most of the time, but not all the time. And those down years can be hard to ignore.

 

If we could accurately predict when those down years would occur, this discussion would be moot. We would simply get in ahead of market upturns and get out ahead of the downturns. But of course, no one can accurately predict when the downturns will come or how long they will last. As Nobel Laureate Paul Samuelson said, "The stock market has forecast nine of the last five recessions."

 

What we can predict is, if you are an optimist who takes a long term view of the market, you will prosper over the years because you will have found a proven strategy for success. The investor who takes the opposite approach - who is bound up in fear and as a result monitors his portfolio constantly and reacts out of fear to short term declines in value, will not be successful over the long run.

 

This is the Performance Paradox. The more you want or need it, the more you try to get it, and the more you micromanage it, the worse it will be.

 

So which are you? Do you take an optimistic long-term view of the market? Or do you try to micromanage the short term performance of your portfolio?

 

Next week, I'll look at the flip side of the Performance Paradox - greed. Then we'll talk about the antidote. Stay tuned.

 

Kim Snider, Kim Snider Financial Communications, Chronim Investments and/or Snider Advisors make no representation that the information and opinions expressed are accurate, complete or current. The opinions expressed should not be construed as financial, legal, tax, or other advice and are provided for informational purposes only. Call 866-952-0100 to request the Snider Investment Method™ Owner's Manual, which includes a description of the Snider Investment Method, investment objectives, risks, suitability and other information. Please read and consider carefully before investing. All investments are subject to risk including possible loss of principal.

All We Can Know About the Stock Market

Way back in the day, when I used to trade for a living, I probably placed nine bets that a stock or index would go down in the near future for every time I placed a short-term bet on up. It is just my natural bias.

 

Some people look at a chart or a news story and their brain reaches for why this should go up. Mine goes instantly to why it will go down.

 

But as an investor, and someone who teaches others to invest, I believe you CANNOT make money betting AGAINST the U.S. stock market.

 

The data is overwhelmingly convincing on this point. Since 1926, the U.S. Stock Market has averaged 10.4% per year (Ibbotson). Bonds, in general, have averaged 5.4% over the same time period, while U.S Treasuries have barely outpaced inflation at 3.7%. Inflation is running at 3% a year. Again, these are all averages.

 

No one would argue that stocks do not carry risk in the short term. That is why, as a trader, with a four hour time horizon, I used to bet on stocks going down all the time - and win (sometimes).

 

Even over longer time horizons, stocks will go down. Looking back over time, it is reasonable to expect a losing year every couple years. More frustrating, even when markets in general are going up, individual stocks of perfectly good companies will go down, often for no apparent reason.

 

Take yesterday for example. The market went up 117 points. 2,110 stocks on the New York Stock Exchange went up and 1,188 went down. 164 stocks made new 52 week highs. An even greater number, 203, made new 52 week lows.

 

But that is the short run. Let's look at the long-run.

 

Over any given five-year period, stocks have lost money just 10% of the time. Stocks have beaten the return of bonds and cash equivalents in about 80% of all rolling five-year periods. And stocks have beaten bonds and cash in all rolling 20-year periods since 1926.

 

To borrow from Nick Murray:

 

"There are really only a few things we can know about the market. Fortunately, they're the only things we ever need to know. (1) It will continue to reflect the growth of the leading companies in the world's most innovative, most flexible, most transparent economy. (2) Because of its inherently higher volatility, it will always provide significantly higher returns than do less volatile asset classes like bonds. (3) No matter what the market is doing today, nor what you fear it may be doing tomorrow, ten years from today you will wish you had invested in it every dollar you could have laid your hands on."

 

SOURCE:

 

1. Nick Murray. "It Goes To Show You Never Can Tell," Financial Advisor, November 2007; p45, 46, 175 <No on-line version available>

 

 

Kim Snider Financial Communications makes no representation that the information and opinions expressed are accurate, complete or current. The opinions expressed should not be construed as financial, legal, tax, or other advice and are provided for informational purposes only. Diversification does not protect against market losses in a declining market. Call 866-952-0100 to request the Snider Investment Method™ Owner's Manual, which includes a description of the Snider Investment Method, investment objectives, risks, suitability and other information. Please read and consider carefully before investing. All investments are subject to risk, including possible loss of principal.

It's All In How You Look At It

Look at the ballerina below. Is she turning clock-wise or counter-clockwise?

I see her turning clockwise, which is supposed to mean I am more right brain. Most people will see her turning counter-clockwise, which means you are more left-brain. But the cool thing is you can change which way she turns.

 

Focus on her turning the other way. Sometimes I have to look off the screen to get her to change. Sometimes it is really hard. Can you do it?

 

It just goes to show it is all in how you look at it. I had a caller on my radio show on Saturday who said he had pulled all of his money out of the stock market because he was afraid of terrorism. In other words, he was afraid of the risk. I, on the other hand, always have all of my money IN the stock market (by way of the Snider Investment Method™) because I too am afraid. Only I am afraid of running out of money.

 

Some people focus on short term risks that cause temporary market declines and opt for cash or bonds to manage risk. I focus on longer term risks like inflation and longevity and opt for generating cash flow from stocks to manage risk. Both of us see the same set of facts but interpret them differently.

 

Who is right? I guess it depends on how you look at it.

Kim Snider Financial Communications makes no representation that the information and opinions expressed are accurate, complete or current. The opinions expressed should not be construed as financial, legal, tax, or other advice and are provided for informational purposes only. Diversification does not ensure a profit or protect against loss of in a declining market. All investments are subject to risk, including possible loss of principal. Call 866-952-0100 to request the Snider Investment Method™ Owner's Manual, which includes a description of the Snider Investment Method, investment objectives, risks, suitability and other information. Please read and consider carefully before investing.

A different perspective on market volatility

It is my experience that you have three primary concerns when it comes to your investments: 1) Catastrophic losses of principal; 2) Outliving your money; and 3) Knowing who to trust. Am I right? Talking to people just like you, day in and day out, I know those fears are heightened by extreme market movements like we have experienced in the last few weeks. True?

 

So I thought it might be helpful to give you some perspective on market volatility from various authors who I know and respect. From Dr. Benoit Mandelbrot¹, in The (Mis)behavior of Markets:

 

From 1916 to 2003, the daily index movements of the Dow Jones Industrial Average do not spread out on a graph paper like a simple bell curve. The far edges flare too high: too many big changes. Theory suggests that over time, there should be fifty-five days when the Dow moved more than 3.4 percent; in fact there were 1001. Theory predicts six days of index swings of more than 4.5 percent; in fact, there were 366. And index swings of more than 7 percent should come once every 300,000 years; in fact, the twentieth century saw forty-eight such days.

 

In other words, there is far more volatility in the markets than most people realize. That is Dr. Mandelbrot's central message. Rather than ignore this risk, I think we should be teaching people how to make it work to their advantage.

 

From Nassim Nicholas Taleb², in Fooled by Randomness:

 

Prices swing more than the fundamentals they are supposed to reflect, they visibly overreact by being too high at times (when their price overshoots good news and when they go up without any marked reason) and too low at others. The volatility differential between prices and information meant that something about 'rational expectation' did not work.

 

Prices swing more than the underlying fundamentals because markets are driven by the human emotions of fear and greed. Neither of these have anything whatsoever to do with the underlying fundamentals.

 

From Ed Easterling³, in Unexpected Returns:

 

The average annual change for the Dow Jones Industrials Average stock market index, as a simple average, is just over 7% over the past century, 1901-2003... Over that period, what percentage of the years would you expect the annual change would occur in the range of -10% to +10%? Most investors seem to guess a number between 60 to 70 percent—that a clear majority of the years would be inside the range. What range would be required to include half of the years inside that range? … It is very surprising to most investors that the yearly range in the stock market has been inside the range of -10% to +10% only 30 percent of the years. Remarkably, to include half the years inside the range, it has to be expanded to -16% to +16%.

 

Of course, that also means that 50% of the years had a return of greater than ±16%, too. For an investor who looks at his or her portfolio value as a gauge of success, those swings would be pretty scary. For a cash flow investor, who gauges success by the amount of income a portfolio can generate, and by extension, the sort of lifestyle the portfolio can sustain, those market swings should be irrelevant.

 

Finally, there is this from Peter Bernstein⁴ in, Against the Gods: The Remarkable Story of Risk, who I tried to get on the show but could not:

 

For true long-term investors—that small group like Warren Buffet who shut their eyes to short-term fluctuations and that have no doubt that what goes down will come back up—volatility represent opportunity rather than risk, at least to the extent that volatile securities tend to provide higher returns than more placid securities.

 

This is the approach I take to volatility. Volatility is my friend, not the enemy. I love, love, love volatility. To me, the last month or so has been the absolute ideal!

 

How do you feel about big market moves? Do they scare you? Make money for you? Or not affect you at all? Do any of these perspectives surprise you? Do you agree? Disagree? Feel free to leave your thoughts and comments below.

 

We have taught 3009 investors how to:

 

• Manage their emotions
• Preserve capital
• Get growth even as markets decline
• To generate enough portfolio income to do what they want, when they want, without worrying about market ups and downs.

 

If you have over $25K to invest, register today for our free introductory class on cash-flow investing and the Snider Investment Method™.

 

 

 

 

1. I first interviewed Dr. Mandelbrot in 2004 for my radio show. Dr. Mandelbrot is the father of fractal geometry, which in case you are interested, is what makes all of today's amazing computer animation so lifelike. He is also the Sterling Professor of Mathematics at Yale and a Fellow Emeritus at IBM's Thomas J. Watson Laboratory.

 

2. I first interviewed Nassim Taleb for my radio show in August, 2004. (You can listen to the podcast of that interview here.) In fact, it was Nassim Taleb who introduced me to both Dr. Mandelbrot and Terry Burnham. In addition to Fooled by Randomness, Nassim Taleb is also the author of the recent best-seller, The Black Swan. Dr. Taleb is a fellow at the Courant Institute of Mathematics of New York University.

 

3. I first interviewed Ed Easterling for my radio show in April, 2005. We have had him on several times since. (You can listen to the podcasts of our interviews here and here.) Ed is the founder of Crestmont Research and Adjunct Professor at SMU's COX School of Management where teaches a graduate course on hedge funds. Ed's website, crestmontresearch.com, is a wealth of wonderful primary research on market cycles.

 

4. Peter Bernstein is the one author on this list who I do not know. I talked to his assistant about getting an interview on my radio show some years ago and he declined. Peter Bernstein is the author of the semimonthly analysis Economics and Portfolio Strategy. He has authored six books on economics and finance. He was the first editor of The Journal of Portfolio Management.

 

Kim Snider, Kim Snider Financial Communications, Chronim Investments and/or Snider Advisors make no representation that the information and opinions expressed are accurate, complete or current. The opinions expressed should not be construed as financial, legal, tax, or other advice and are provided for informational purposes only. Call 866-952-0100 to request the Snider Investment Method™ Owner's Manual, which includes a description of the Snider Investment Method, investment objectives, risks, suitability and other information. Please read and consider carefully before investing. All investments are subject to risk including possible loss of principal.