That Wealth Advisor-guy


Manager Performance is Mean Reverting.
October 10, 2007, 1:41 pm
Filed under: Investing

Did you know that if you invested your monies in the best performing money mangers based on trailing Three Year returns, that there’s an 85% chance these same funds will under-perform the next three yers while taking higher risks?

In other words, if you invested in one star Morningstar funds, you’d stand a damn good chance of out-performing the 5 stars 85% of the time.  Good things get less good over time, and bad things get better.  There is no scientific or statistical evidence for the persistence of performance.

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“The harder I work, the luckier I get.”
October 9, 2007, 1:21 pm
Filed under: Behavior, Investing, The Punctuation Problem

That quote’s been attributed to Samuel Goldwyn, Thomas Jefferson and Benjamin Franklin, respectively.  Whoever said it could have just as easily been speaking about investing.  The harder you work, the more money you can save up and place into investments, the luckier you’ll be with your performance. 

JUST SO LONG AS YOU DON’T DO ANYTHING NUTTY.  By that, I mean, that you allow that Wealth Advisor-guy to do what he’s paid to do and that’s keep your money growing.

The average actively -managed mutual fund returns approximately 11%, give or take, per year.  The average mutual fund investor garners (depending on whose numbers you trust, check Dalbar’s)  4% per year.  Whaaaaaaaaa?!?  How is that possible, you ask?

Behavior.  Most investors underperform dramatically because of what I like to call The Punctuation Problem.  Where they should be seeing ellipses, they see exclamation points.

Example: How about the:

August Credit Crisis Meltdown!  Run for your lives!  Sell the bonds!  Sell the kids!    Fly to safety – whatever that is! 

So now you’re sitting in cash, waiting for “the market” to “settle down.”  And you’ve lost 1100 points on the Dow.  

 credit-crisis-chart.png

When Warren Buffett and Peter Lynch and other investment luminaries say you can’t call the market successfully in the short term, you should listen.  Buffett’s Berkshire shares lost over $6 BILLION DOLLARS between January 17 and August 31st, 1998! That’s right, in 45 days, he watched his net worth slip by $6,200,000,000! 

 Alas, as the consummate investor, he didn’t sell. 

Alliance Bernstein put together a great piece that discusses the school of thought known as behavioral finance.  The guys that came up with it won a Nobel Prize, so maybe there’s something to it.

Insights from Behavioral Finance