Tim Harford: Trial, error and the God complex | Video on TED.com

Our world is so complex, no one person can understand, manage or control:
Science
Politics
Economics
Investing

Tim Hartford is one of those economists that makes economics accessible for the masses.

Tim Harford: Trial, error and the God complex | Video on TED.com

Brain Pickings - cool web site/newsletter for people interested in our world.

I came across this site and thought I would share:

http://www.brainpickings.org/

During this turbulent time, wise advice from Burton Malkiel.

"A Random Walk Down Wall Street" has been a huge influence on my investment approach. It is one of my top recommended books on investing. In this excerpt from an op-ed in last Novembers WSJ, Burton Malkiel defends a diversified buy and hold strategy. It is particularly important to heed this good, wise advice during turbulent, uncertain times.

Malkiel  has been a professor of finance at Princeton for over 40 years. His book is in its 10th edition. It is a classic. His advice is wise and relevant: Stay diversified, rebalance, keep your fees low, stay the course.

By Burton G. Malkiel

 The timeless investment maxims of the past remain valid. Indeed, their benefits may be even greater today than ever before.

Many obituaries have been written for the investment strategy of buy and hold. Of course, investors would be better off if they could avoid being in the stock market during periods when it declines. But no one—either professional or amateur—has ever been able to time the market consistently. And when they try, the evidence shows that both individual and institutional investors buy at market tops and sell at market bottoms.

Money poured into the stock market at the peak of the Internet bubble during the first quarter of 2000. Stocks and mutual funds were liquidated in unprecedented amounts at market bottoms in 2002 and 2008. Professional investors had large cash holdings at market bottoms but tended to be fully invested during market tops. Buy and hold investors in the U.S. stock market made an average annual return of 8% during the 15 years from 1995 through 2009. But if they had missed the 30 best days in the market over that period, their return would have been negative. Market strategists called for a sharp market decline in late August 2010 as technical indicators were uniformly bearish. The market responded with its best September in decades.

While no one can time the market, two timeless techniques can help. "Dollar-cost averaging," putting the same amount of money into the market at regular intervals, implies investing some money when stocks are high, but also ensures some buying at market bottoms. More shares are bought when prices are low, thus lowering average costs.

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Associated Press

While no one can time the market, two timeless techniques can help.

The other useful technique is "rebalancing," keeping the portfolio asset allocation consistent with the investor's risk tolerance. For example, suppose an investor was most comfortable choosing an initial allocation of 60% equities, 40% bonds. As stock and bond prices change, these proportions will change as well. Rebalancing involves selling some of the asset class whose share is above the desired allocation and putting the money into the other asset class. From 1996 through 1999, annually rebalancing such a portfolio improved its return by 1 and 1/3 percentage points per year versus a strategy of making no changes.

Diversification has not lost its effectiveness. Over the past several years, when stocks went down, bonds went up, preserving the value of the portfolio. And while stock markets around the world have tended to rise and fall together, there were huge differences in regional returns. Even though portfolios in the U.S. market actually lost money in the first decade of the 21st century, emerging-market stocks enjoyed returns of more than 10% per year. Every portfolio should have substantial holdings in the fast-growing emerging economies of the world.

Low-cost passive (index-fund) investing remains an excellent strategy for at least the core of every portfolio. Even if markets may not always be efficiently priced, index funds must produce above-average returns after costs. All the stocks in the market must be held by someone. Therefore, if one active portfolio manager is holding the better-performing stocks, then some other active manager must be holding those with below-average returns. But active managers charge substantial investment fees, and their buying and selling of securities in their attempt to beat the market generates significant transaction costs (and possibly greater taxes). Index mutual funds and their exchange-traded-fund (ETF) cousins do not trade from security to security, and they charge rock-bottom expenses (usually well below one-tenth of 1%).

The one investment principle about which I am absolutely sure is that the less I pay to the purveyor of an investment service, the more there will be for me. As Jack Bogle, founder of the Vanguard Group, says: "In the investment fund business, you get what you don't pay for."

The evidence is clear. Low-cost index funds regularly outperform two-thirds of actively managed funds, and the one-third of actively managed funds that outperform changes from period to period. Even the very few professional investors who have beaten the market over long periods of time—Berkshire Hathaway's Warren Buffett and Yale University's David Swensen, for instance—are quick to advise that investors are likely to be much better off with simple low-cost index funds than with expensive actively managed funds.

The chart nearby illustrates how someone who invested $100,000 at the start of 2000 and, following my advice, used index funds, stayed the course and rebalanced once a year, would have seen that investment grow to $191,859 by the end of 2009. At the same time, someone buying only U.S. stocks would have seen that same investment decline to $93,717.

The recommended index-fund portfolios contain bonds, U.S. stocks, foreign stocks (including those from emerging markets) and real-estate securities. The diversified portfolio, annually rebalanced, produced a satisfactory return even during one of the worst decades investors have ever experienced. And if the investor also used dollar-cost averaging to add small amounts to the portfolio consistently over time, the results would have been even better.

If you ignore the pundits who say that old maxims don't work and you follow the time-tested techniques espoused here, you are likely to do just fine, even during the toughest of times.

Mr. Malkiel is a professor of economics at Princeton University. This op-ed was adapted from the upcoming 10th edition of his book "A Random Walk Down Wall Street," out in December by W.W. Norton.

The debt ceiling crisis, should you make changes in your 401K?

 For starters, a good explanation of the debt ceiling issue by the LA Times: http://articles.latimes.com/2011/jul/12/nation/la-naw-0713-debt-talks-qanda

The debt ceiling crisis: Should you do anything with your 401K?
My short advice is: if you are invested in a well diversified portfolio that you do not need to touch for at least 10 years  and which was built with your risk tolerance in mind then you should stay the course.
Most recommended portfolios by advisers are based on an efficient allocation of different investment options. That means they are invested in a broad range of US stocks, international stocks, corporate and government bonds.
These portfolios are designed based on what has worked over many decades of financial market activity.
For example a simple stock portfolio that consisted of holding 70% of the US stock market and 30% international stocks would have given an investor a 13.5% return since 1973. That period of time has included the Vietnam war, Watergate,oil shortages, double digit inflation and interest rates in the late 1970's, the stock market crash of 1987, 9/11, wars in Afghanistan and Iraq, the financial crisis of 2008. There has been some wild swings during that period, but an investor who stayed the course was rewarded.
Currently the US government is debating whether it will allow itself to continue to borrow money to pay its bills. It also means that tough decisions will have to be made. In the end, the US has huge obligations and the government will make decisions that will probably mean some sort of increase in taxes and lower spending over the long term.
In addition, good fundamentals are still in place: a stable government built on the rule of law, property rights, rewards for innovation. In fact, last week as European nations continue to struggle with their debt issues, investors fled to the "safety" of US treasury bonds. We may not look pretty right now, but we are still the nicest house in the neighborhood.
Could there be some turmoil in the coming weeks? Yes, but, in the long run, the government will reach a compromise and markets will stabilize.
Another way to think about is to think of what would happen under the doomsday scenario: the US government defaults on its debts and payments, doesn't reach an compromise and collapses. Well in that case, where you have moved your money will not matter. Treasury bonds, and the dollar will be worthless, banks will fail, the economy will collapse, stocks will be worthless. your investment decisions will not have mattered.
So, the only real alternative is to have faith and stay the course. Because, "defensive" moves have a high probability of being futile. They may make you feel good, but in the long run they will result in poor investment returns. We know from many academic studies: trying to time markets and sell one sector to buy another is a losing strategy. Nobody has devised a system that successfully times the market accurately  over a long period of time.
If you need your investment money within the next couple years, you should not be in stocks or any type of bond that has a maturity longer than 3 years. That money should always be in an FDIC insured savings account or in short term US treasury bonds (less than 3 years maturity).
Finally, my own review of other recommendations from industry advisers that I respect is the same as mine above: stay the course and stay diversified.



We know that

Find me at AWMfinancial.com

I am pleased to announce an updated website that I feel better describes my services and approach to financial planning and investing.

please go to www.AWMfinancial.com

The resources page has links to my recommended investment reading and some great blogs and web sites.
The "fees matter" page is eye opening
and
"the tortoise and the hare" explain my investing philosophy.

AWM portfolios receive 5 star ratings from Morningstar

I am pleased to report that the AWM model portfolios have been given  5 Star designations by Morningstar - an independent rating agency.

The rating means that the portfolios achieved above average returns relative to the risk of the portfolio.

The AWM 100%, 80%, 60% , and 40% equity portfolios all rated 5 Stars.

For a copy of the Morningstar reports on the portfolios please email Michael Angelucci at mcangelucci@gmail.com

Lessons from The Big Short

Michael Lewis is the author of: Liars Poker, Moneyball, and The Blind Side among others: all informative and entertaining. He does it again with The Big Short.


Lewis tells the story of the financial meltdown through the history of several who saw it coming. At the heart is mans greed. Even those who should have known better - the Wall St firms, let greed consume them and  they ignored the unreasonable assumptions on the continued growth of property values and risk, then continued to buy and sell bad investments because they did not want to be left out of the party.
You will be angry at the hubris and irresponsibility of those that should have known better.
For me this is another episode in the history of human greed. Greed drives human behavior so often and so often leads to destruction. It makes us blind to rational decision making and we end up following Madoffs, buying pets.com,  buying gold today,  Wall St creating or buying mortgage backed securities knowing that they were a house of cards. All for fear of being left behind and not making money when it appears everyone around us is getting rich quick.


Whether you are Morgan Stanley, Merrill Lynch, Bear Sterns, Lehman Bros etc. or you are an average investor, the lessons, and they are not new, are:


1. There is no free lunch
2. If it is too good to be true - it is. Do your homework, especially when it appears everyone is making easy money.
3. The higher the return the greater the risk and  the potential to lose your investment.
4. You do not get better than CD returns without the chance of short term losses. 
5. If you do not understand the investment you are buying don't buy it. 


Hopefully good investors and our financial leaders will be students of history, hopefully  they will learn from this story. But beware: human nature has yet too change, bubbles and irrational exuberance will reoccur, those that have learned from history and stay true to economic/financial fundamentals will generally survive the next bursting.