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  • Nobel Prize Goes to....

    RIchard Thaler of The University of Chicago Booth School of Business has been awarded the Nobel Prize in Economics.

    Thaler is known for his contributions to behavioral economics, one of my favorite subjects. Our job as advisors is part financial and part psychological . The balance of those parts, while different for everyone, affects everyone.

    "Left-brainers" tend to think they are less swayed by emotion and more fact-based. However, mountains of research (much done by Thaler on mental accounting), tells us that all humans are emotional beings, especially about money. One of our critical roles (if not the most critical role) as advisors is to help clients make good decisions for themselves on large scales. Understanding where we fall short in decision-making is part of how we do this.  Studying behavioral sciences helps us get there. Richard Thaler should be commended.  Well done, Nobel committee.

  • Scary Charts

    I have always been fascinated with the misuse of statistics to tell stories.  There is a great blog called Spurious Correlations that I read when I want a good laugh and a reminder that statistics are not always what they seem.  Of course, the point of this blog is to remind us one of the most common statistical fallacies – correlation does NOT indicate causation.  For example, the blog shows a nearly perfect correlation (99.79%) between US Spending on Science, Space and Technology and Suicides by Hanging, Strangulation, and Suffocation.  Clearly, there is no causal effect either direction.

    Here we are after a long run-up in stock markets, particularly US Large Stocks, and the “scary charts” are starting to appear again.  Anytime you see a chart that looks like this and you start to panic….

     

     

    Stop, and read this:

    “The ‘Scary Chart’ Fallacy”, by Mathematical Investor

    “The Unfortunate Rise Of The Misleading ‘Scary Chart’ Comparisons Again” by David Templeton

    A simple scaling problem can make things look a lot different from reality. Statistics and charts are easily to manipulate to tell the story you want to tell.  As investors, we have to cancel out this noise and remember that our portfolios are structured to achieve positive, long term expected returns. Don’t be fooled by the sensationalism of journalism.

  • Futility in Market Forecasts

    I ran across this gem of an article while doing some research today.  A common article filled with predictions of what is to come in global markets:

    Why the Best Investment In 2016 Might be Global Real Estate

    When reading the article, it seems to make sense.  After all, at the time of writing this, US large stocks had been on quite and upward trajectory for years so they could not possibly continue to climb.  Rate hikes would surely kill bond investors. China’s economic uncertainties would rattle global stock markets.

    Here is the problem I have with these predictions: They are not just useless, they are toxic to an investor.  This article presents the predictions as close to facts as possible: “Market consensus now has equities flat to negative in 2016.”  “There is a cocktail of uncertainty…”.  “We are entering a period of a bond bear market…”.  

    Here are two key concepts to keep in mind:

    1. There is ALWAYS uncertainty in investing.  This is the reason you are compensated as an investor.  Without uncertainty, there is no return.  Saying there in uncertainty or expected volatility means nothing, except to scare investors into reading your article.
    2. No one, I mean, NO ONE, has knowledge of the future.  The best economists, analysts, and market prognosticators can crunch numbers all day, but none has a crystal ball.  The future is unknowable.

    This is can be severely damaging to investors if they heed the advice in these articles and adjust their portfolios accordingly.  Let us look at how this article’s predictions faired:

    1. Assertion 1: Equities will be flat to negative in 2016: 

    MSCI World Ex USA (gross div)

    3.29%

    MSCI World Ex USA Small Cap Value (gross div)

    8.42%

    Russell 2000 Index

    21.31%

    S&P 500 Index

    11.96%

    MSCI Emerging Markets Index (gross div)

    11.60%

     

    1. Assertion 2: There will be a bear market in bonds:

    Bloomberg Global Agg. Bond Index (hedged to USD)

    3.95%

    BofA/ML 1-3 Year Treasury Index

    0.89%

    Bloomberg Barclays US TIPS Index

    4.68%

     

    1. Assertion 3: Real Estate is the best investment for 2016:

    Dow Jones US REIT Index

    6.68%

    S&P Global Ex US REIT Index (gross div)

    4.00%

     

    The most successful long term investors have the ability to tune out the “noise” associated with short terms market movements and articles like this. While I may be picking on this article today, they are but one of many that do the exact same thing. Sometimes, they get it right.Most of the time, they don’t.  

    The good news is that it doesn’t matter. You do not have to be able to predict the future to be a successful investor. On the contrary, you must be disciplined.  A diversified portfolio that focus on long term drivers of returns is your best bet. 


     

  • Snowpocalypse 2017

    The scramble of South Carolina’s counties, towns, and school districts in the wake of “the big snow” always ignites my brain to draw parallels between weather and money, particularly in the way people feel about both.  When forecasts turn out to be wrong, there is no shortage of anger, annoyance, and jokes that flood social media accounts.  My facebook feed for this weekend includes:

    “The only job where you can be wrong constantly”

    “I can predict better by just looking out my window”

    So there are two sides to the coin: is forecasting really that bad?  Or are we just oversensitive when the weather predictions fail? 

    Wait – we are a financial planning firm – I will come back to that.

    According to ForecastAdvisor.com, at the time of this writing, MeteoGroup had the best data accuracy for the last year for our zip code at about 77% overall.  This combines both weather (highs and lows within 3 degrees to forecast) and precipitation.  Overall, its not as bad as it may seem – our brains may be wired to think these weather forecasters perform worse than they really do.  However, when a weather forecast goes wrong, very wrong, there can be devastating consequences – floods, ice storms, hurricanes can have life-changing impacts.

    Which brings me back to investing.  Traditional stock pickers have a pretty rough record of outperforming or even matching the market as a whole (See here or here - the debate rages on).  They make weather forecasters look like geniuses - only about 20% of active fund managers beat their benchmark in a given year...when you go out further, repeat performance is even more dismal.  And the consequences of picking poorly can also have dire consequences to the end user – the investor.

    So what can we do differently?  Rather than focus on the short term movements in stock markets (weather), we look at the bigger picture (climate).  We look at the long term – 10 years, 15 years or more and determine what scientifically, statistically, and empirically earns money for an investor.  We remove much of the day to day nonsense and focus on getting it right in the long term.  We stop making short term “forecasts” because we know they are, at best, worthless.  Unfortunately for weather forecasters, they don’t have this option, so they keep plugging along as best they can at 77% accuracy.

    Here are my takeaways from this:

    1. Don’t be too hard on the weatherman – he has a nearly impossible job.
    2. Don’t treat investing like weather forecasts – treat it like long term climate forecasts.  Those are a lot closer to reality.
    3. Don’t get caught in the day-to-day drama of being right or wrong.  A good financial plan can weather nearly any storm.

    Happy Snowpocalypse 2017!


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