How to Invest
Know Where You Stand
The path to investment success starts by understanding that the existing system was developed by the financial services industry (and supported by the financial media) for its own benefit. Their number one goal, as it is for any business, was to make as much money as possible and on the surface there's nothing wrong with that. Unfortunately in this case the goal to make as much profit as possible happens regardless of whether their clients make money or not.
The result is that the American public has been subjected to one of the greatest marketing campaigns in history. For the financial services industry, the system they built and sold so very effectively been a tremendous success. For the American public, it’s been a disaster. It is a system that doesn't work. It never did and it never will.
What I am telling you is that your very first step to achieving investment success is to reject the current approach to investing and replace it with one that works. Millions of people just like me have successfully invested and avoiding the disastrous system being sold to everyone and avoiding losses with market dips. The reason you haven't heard about it is because, unlike the system that's been sold to everyone, the people that are doing things right don't have a vested interest in spreading the word and telling you what to do.
People who know how to make money, make money. They generally don’t go around telling other people how to do to it. The only reason I started the Money Smart project was because I just couldn't sit and watch anymore. The destruction of millions of people's lives to satisfy the ego and greed of a few finally got to me.
So how do you do invest safely and successfully? You start by first rejecting the existing system and to do that you must recognize the myths it is built on.
MYTHS:
- Managing your money is very complicated
- The experts are better at it than you are, and
- It's always a good time to buy and to invest
The truth is that managing your money is not complicated, provided it’s explained properly. To show you this, I'm going to teach you how to invest your money in the stock market yourself and do it far better than any expert is likely to do for you. You need no special background or education whatsoever to do it, and I assure you it’s not complicated.
Investing Successfully
There are 3 steps to investing successfully:
Step 1- Manage Your Own Investments
Time and again, studies have documented that you can invest your money better than the experts and time and again those studies were effectively buried by the financial services industry and the financial media. Let's take a look at two of the most powerful of those studies.
The first study was Assessing the Costs and Benefits of Brokers in the Mutual Fund Industry by Daniel Bergstresser of the Harvard Business School. It was considered so comprehensive it was dubbed, “The Study of the Decade - teams of people from the Harvard Business School and from a number of other organizations coming together to study trillions of dollars of transactions over many years. The financial industry supported the study, provided the data, confident the results would be a great marketing tool to show their clients what a good job they were doing. Well you never heard about this study did you? Here's why:
Study Conclusions:
- As a group, financial advisors in America not only underperformed the market as a whole, they underperformed what most people do on their own without an advisor.
- Individual investor’s returns were over twice those of the experts.
- Advisors do not provide superior asset allocation.
Now let's look at the second study. The Dalbar Corporation is considered by many to be the #1 financial services market research firm in the country. Here are the results of their study of 1984-2004, which were far and away the 20 greatest years in U.S. stock market history:
- $10,000 invested exclusively in the S&P 500 index became $119,943; an inflation adjusted profit of $101,875.
- $10,000 invested in managed funds generated an inflation adjusted profit of only $2,748!
The stock market growth was amazing during that time period. Yet most people, following the advice of the financial services and the financial media, rolling from one "hot" mutual fund to the next, encouraged and advised to "outsmart" the market, paying all the commissions, fees and trading costs involved made essentially nothing! $101,875 vs. $2,748!
So where did everyone's money go? The retirement nest eggs of tens of millions of people? First and foremost what you see is who pays for the multi-billion dollar financial services industry. You do! Second, you're looking at an industry that never did learn to invest successfully, just how to very successfully sell the idea that they do.
Provided below are links to the two groundbreaking studies discussed above and to "inside the industry": articles about them. I highly recommend reading the article that was posted on Morningstar regarding the Harvard Study.
Morningstar article on the Harvard study- http://trendfollowing.com/whitepaper/The%20Study%20of%20the%20Decade.pdf
The actual Harvard study- http://www.people.hbs.edu/dbergstresser/dbjchpt.pdf
Article on Dalbar study of 1984-2004- http://www.profutures.com/article.php/184/
Dalbar Study for 1984-2005- See page 31 for results of both 2004 and 2005 http://www.timothyross.com/letters/QAIB_2006_Dalbar.pdf
Scams and Investment Traps Alert: See my blog post The ETF Scam: Beware of Misleading Financial Advice)
Should you show this information to a financial advisor they will undoubtedly begin explaining why they are the exception. If so, I ask you this. Have you ever seen their complete track record for the past 10 years as compared to the overall market? How about the complete track record for their firm? Not just a portion of their results that's been selected to make them look good, but their whole track record? How about all those stars of the financial media? Ever see their track record? And now you know why.
Would you let someone drill your teeth without a track record of having done so successfully? Fix your car, the electrical wiring in your house? Anything of importance? Of course not. Yet most people have been sold the idea that money management is an exception, that it's okay to rely on individuals and companies without a clear track record of success to help them invest their money.
There are financial advisors that actually do have the track record (mine is posted on my site) but they are very much in the minority. If you are lucky enough to have found such a person, you have someone you can actually listen to. Otherwise the answer is simple- Do it yourself.
Step 2- Understand and Act on Market Cycles
Here is a the performance of the U.S. Stock Market over the last 110 years
Source: Schiller, R. J. 2009. Information Site for Irrational Exuberance
What you're looking at is the difference in percent between what the market sold at and the fair value to which the market always eventually returns, which is about 15 times company earnings.
The problem with "always invest for the long run" is that the market goes though long periods of substantial over- and under-pricing, creating long periods of time when you're almost guaranteed to win, and others when you're almost guaranteed to lose. Look at 1966–1981, when investors lost a lot of money for 16 years. Since 2000 it's been another eleven years of losses. That’s 26 out of the last 44 years that the market has consistently lost money. Now look at 1983–2000, when you just couldn’t miss.
This doesn't just happen in the U.S. stock market. All markets go through periods of substantial over- and under-pricing.
Schiller, R. J. 2009. Information Site for Irrational Exuberance
U.S. Census Bureau. 2009. Income: Historical Income Tables – Families
Here's the 80 year price history of the residential real estate market, adjusted for inflation, as compared to building costs and average family income. We've just come through the greatest period of overpricing in history. Tens of millions of people didn't understand that, and no way do we want that ever to happen again.
When a market such as the stock market is significantly over-priced, the only sensible thing to do is to sell your holdings and invest in other better priced markets, such as fixed income or real estate.
If you share this approach with people in the industry, the almost universal response you'll get is that nobody can time the stock market and no, you can't. But you can sure tell when a market is significantly overpriced, and if you invest in anything, I don't care what it is, there's almost no way you can win if you start out paying too much.
My Track Record
- I foresaw the real estate boom of the ’80s, made millions investing in real estate, and then lost it all by believing in the myth of “always investing in the long run” — a mistake I never made again.
- In 1990, understanding the unfolding boom of the stock market, I entered the world of Wall Street, quickly rebuilt my fortune, and consistently beat the market for his clients for the rest of the decade.
- Christmas 1999, I told my clients to get out of the stock market and invest in fixed-income and real estate. Eleven years later, adjusted for inflation, you’d still be in the red if you hadn’t listened to my advice.
- Fall of 2005, I called the top of the real estate market, telling everyone to sell their real estate investments, and to avoid initiating any loans against the prices of the moment.
From now on, make market cycles work for you, not against you. Over time, the improvement in your financial picture is likely to be quite dramatic. Keep in mind that acting on this information is something you'll do maybe only once or twice in a decade.
As for when to make such moves, I provide my take on the current status of the six major investment markets on this website. If you haven't already done so I suggest you sign up for my Smart Alerts to receive an email whenever I update the market evaluations and my investment advice.
When it comes to the stock market, most people should invest in broad-based, no-load (no commission) index funds only. Over the long run, this one simple type of investment has been proven to outperform all other types. Here is a blog article I wrote explaining more about the why’s and how’s of index funds:
How to Invest In the Stock Market… Index Funds
So there you have it, the 3 steps to investing your money successfully:
- Make Your Own Investment Decisions
- Understand and Act on Market Cycles
- Invest in Broad-Based no-load Index Funds Only
Lastly, I will leave you with one more key piece of advice when it comes to investing. The stock market is not the be-all and end-all it's been sold to be. There are other paths to financial freedom that are often far better and far more reliable than just entrusting your financial future to any stock market. Find ways to invest in yourself and your career, learn new skills, maybe start a business.
