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Are We There Yet - Revisited PDF Print E-mail
Written by John Buerger   

John Buerger

Where does the time go?

My son - who I still remember as this little guy who would point out the window into the back yard and say, "Outside Dirt" is now 17 years old, taller than I am, driving a car and looking at film schools for college.

I've been at this blog for more than three years now.  What is amazing is that my writing has aged and improved with time ... and my picture to the left hasn't changed (a little blog humor there).

I'm not afraid of my previous positions.  You and I can both go back and read everything I wrote: the points that were extremely prescient as well as the predictions that were not.  They're all there for you so you can judge whether or not this blog has added value along the way.


In reading over some of the articles I've posted over the years, I have become more aware of the power of social dynamics to shape the performance of individual portfolios, the stock market in general and even the overall economy.

Robert Prechter - the present day guru of the Elliot Wave Theory and founder of a discipline called "Socionomics" - suggests that the stock market doesn't drive the economy in any true cause-and-effect way.  The stock market simply reflects social mood which is the driving force behind the economy.  As such a reflection, it can be a solid predictor of future economic change.

Are We There Yet?

This past week, one of my favorite economists, John Mauldin, posted a blog entitled "Are We There Yet."  I wrote an article with the same title - more than a year ago.  In that article I suggested that those who hoped we were finished with the downslide in the market would still have to hold on for more bad action.  I didn't feel that the bottom was in completely.  We had not seen capitulation.  We had reverted to the mean ... but not past it.

That would seem like a bad call on my part.  After all, the market recovered 60% from that point to the recent April high and we are heading back towards that April high again while the recent sovereign debt scare, flash crash and BP oil rig disaster seem to be subsiding.

Prediction Review

Back in May when I wrote the article - unemployment was at 9% and we suggested that 11% wasn't out of the question.  Today we're just shy of 10% with new claims still stubbornly high, the census takers (who added to the ranks of the employed) now being let go and are on our third round of unemployment claim extensions.  Here in California, the unemployment rate is above 12%.  Nationally, the unemployment rate among young people entering the job market is a staggering 16% (or more if you include under-employed and those who opt for grad school rather than trying to find a job at this time).

Where the prediction missed was in the relative short term time frame and the ability of our government to throw absolutely massive amounts of money at the problem (and how effective doing so was going to be in kicking the can down the road).

Are We There Yet - Revisited?

15 months ago the question being asked was, "have we hit bottom?"  Now the question applies to whether or not we have hit a top?

I don't know the answer to that question.  Certainly the politicians will throw everything they can at keeping things moving in a positive direction.  They all want to be reelected to office in November and will margin the future as much as necessary to make that happen.

That could easily have the effect of keeping this Titanic afloat for a few more months - or maybe even quarters.  But when it finally ends (and it will end) it will be fantastic in a very scary and damaging way.

Some New Predictions

Before I get into these predictions, please understand that the one variable I cannot predict is time.  I'm pretty certain that eventually every one of the following will happen.  I just don't know when.

--- UNEMPLOYMENT - I still believe that 11% unemployment is in the cards before this recession ends ... and it could get worse than that.  It is never good for social mood when your friends, neighbors and family members are all out of work.

--- ECONOMY - Whether we ever got out of the last recession or not, growth in the following 18 months will be anemic.  If it stays positive, I will be surprised, but if that does happen it will be at below average levels (less than 2% GDP growth) which will feel absolutely horrible.  This is also not good for social mood.

--- EQUITIES - By the most reliable fundamental standards, the stock market today is over valued by about 30%.  If the market really does roll over and revert to the mean, will it be able to stop when it gets to that mean (as it did in 2009) or will it go past the mean into "under-priced" territory?  Who knows, but history would suggest that at some point we will see persistent below average pricing.  Once the stock market starts to reflect the other social mood issues cited above - it will create it's own cascading spiral downwards.

--- INTEREST RATES - A few months ago I wouldn't have suggested it, but today the probability has increased substantially that we will see LOWER interest rates in the following months.  Mortgage rates could easily get into the three's which is unprecedented.  For those who qualify, this will be a great opportunity.  For the rest of us who aren't excellent credit risks it will leave us feeling that much more bitter.

--- TAXES - This one is baked into the cake already.  Tax rates are going up in 2011.  60% of small business income is taxed at the highest rate - and that rate is going up almost 3% starting on 1/1/11.  Estate taxes look to be reverting back to 55% with a $1 million exemption.  Capital gains taxes will be at least 25% higher next year than they are today.  The Obama administration seems to think this won't matter to the economy.  I can't see how it will be good for social mood.

Add it All Up

When you add it all up, there are four data points that are not good for social mood (unemployment, the economy, equities and taxes) and one that is good for some, bad for others (interest rates).  I am ignoring in this analysis any exogenous issues like war, sovereign debt crisis in Europe or a real estate bubble in China (all of which are more than possible).

Remember, social mood drives the economy.  As long as these negative factors continue to build and until our leaders change their tune - decide to grow our way out of the problem rather than tax and spend our way out of it - the probability is great that some time in the near future (whether it is weeks, months or quarters I do not know) we will find ourselves in much worse shape than we are today.

Are we at the top?  If not, we are close.  There is far more downside than upside risk in this environment.  Plan your finances accordingly.

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Last Updated on Wednesday, 04 August 2010 19:43
Money and Sex PDF Print E-mail
Written by John Buerger   

John Buerger

Money is Like Sex!

In the case of the "keep up with the Jones" types, it is easy to see the parallels between money and sex and how financial decisions can often be corrupted by impulses and emotions.  You see that flat-screen TV in the store.  You know your friends all have one (social proof) and you simply must have one of your own, even if you don't have the money to pay for it today!

But what about those of us who are more practical and rational - those who consult with others on financial choices and think things through before making a decision.  Certainly, we have things under control, don't we?

The short answer is, "No, not really!"

Herding Mentality - A Private Orgy

There is a great article in today's Wall Street Journal by Jason Zweig that explains Why Investors Can't Think For Themselves.  The reason - getting confirmation of value from others not only increases the value you see in something, hearing that validation also releases dopamine into your brain.

The very same reward centers that trigger during sex and drug use fire up when someone else (or many other people) says that they see as much value or more in the same object as you do.

This is built into our hard-wiring, so even if you pride yourself on NOT being a "keep up with the Jones" or impulsive type person, your opinions and valuations are being heavily swayed by what those around you are saying.

Your Financial Circle of Influence

If most financial decisions are heavily influenced by the opinions of others - and mountains of clinical research in behavioral finance shows that it does - what/who is influencing you?

It is worth taking a moment to understand your particular situation and circle of influence because those people have a significant impact on your financial choices and net results.

A new independent study commissioned by the Financial Planning Association shows that the top resource most people turn to for financial assistance is "friends, family and colleagues."  More than one-third (38%) seek out advice (and validation) from people who are close to them in their lives.  Second on the list at 32% was "none" (more on this in a bit).  #3 (29%) was the internet.

"Professional Financial Advisor / Planner" was tied at #4 (16.8%) with newspapers and magazines.

Friends = Trusted and Free Advice

One reason why "Friends, Family and Colleagues" is the #1 resource for financial advice has to do with the trust factor.  These people already know you.  You are familiar with them.  Familiarity breeds trust (even when it shouldn't necessarily do so) and since financial decisions are often held close to the vest, the opinion of a trusted, familiar person would seem appropriate.

Also in the grand scheme of things, the advice offered by friends is free - often with no visible strings attached (although I think we all know deep down that often there are strings we just don't see).  Because it costs less, we often equate a higher value to it.  Humans are always looking for a bargain.

I have written in the past about the relationship between price and value and this is a situation where common logic is completely twisted.  Especially when it comes to getting help with rational or logical choices like personal finance, medicine, law or business; valuable advice is never free - you get what you pay for.

If you are sick and present your symptoms to a close friend who doesn't have thousands of hours of medical education and thousands more of experience, how much confidence should you really have in their diagnosis?  Very little, but people do it all the time - equating free advice with valuable advice.

Sure, 9 times out of 10 the free advice will be similar to the doctor's expensive diagnosis.  But it is that one out of ten times where the free advice is dead wrong (pun intended) that is the problem.

None = Delusion

The #2 response on the FPA survey was "none" - people are trying to navigate today's treacherous financial waters totally on their own.  That's like shooting a white water rapid without a kayak, raft or even a swimming suit.

I also think this response is delusional at the core - these respondents are ignoring the reality that they ARE influenced by others.  Most likely that influence is the evening news, headlines or talk around the water cooler.  In today's high-tech world, it is impossible to make financial decisions in a vacuum.  Even if you could, those decisions would have to be based on some sort of education or research.  To me, the "none" response is more likely an "all of the above but I'm scared to admit it" response.

The Internet

The #3 resource for help in making financial decisions was the internet.  This also has appeal because it is free - I won't repeat that price vs. value argument again.

What is interesting is the belief that if you have a lot more information (which the internet offers), somehow all of that information will come to a result that can be trusted more than just one resource.   To an extent I agree with this, but with one caveat - you have to be willing to read through ALL the information that is available and that takes a lot of time and energy.

You are at the whim of the search engines and they aren't perfect.  Search engine results are heavily manipulated by Search Engine Optimizers and other games.

The general dialog about financial issues is also swayed by those that have a vested interest in keeping the status quo.  Certain truths (like the 10% Myth) don't immediately (if ever) gain national traction.

The internet is a useful tool.  There are resources for financial information that are full of useful facts and ideas without all the impulsive, manipulative stuff.  I know I am biased in this opinion, but I believe it is better to start working with a fiduciary professional and access his/her list of trusted internet resources than it is to jump into the wild wild west and take whatever Googles to the top as gospel truth.

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Comments (1)
1 Monday, 21 June 2010 17:39
The advice-from-friends problem is compounded by the fact that most of that advice mimics the mainstream media. It's exactly what's available in the media, so not only do you have social proof there, but also validation. When people hear advice enough times, they don't question it, and they become part of the herd.

The problem with that combination is that while many people know the mainstream information as it appears on the front page, few ever know anything deeper. The internet can confuse by the sheer volume of information, which can send you crying back for the simplicity of your friends and the media.

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Last Updated on Monday, 21 June 2010 16:54
Boing Boing Boing PDF Print E-mail
Written by John Buerger   

John Buerger

Remember the old Mazda car commercial touting the Wankel Rotary engine?  The piston engine goes "boing, boing, boing" while the rotary engine goes Hmmmmmmmm.

The same could be said of your investment portfolio - especially if that portfolio is only invested in stocks and bonds (as most portfolios are, sad to say).  Your net worth goes "boing, boing, boing" with the markets while a smarter portfolio (including other asset classes) will produce much smoother and steadier results.

I thought of this commercial while I was reading a technical article in Investment Advisor magazine (March, 2010 issue) about reducing risk in a portfolio by actually adding riskier asset classes.  This is a technique we've used for years and it works well (as long as the asset class being introduced has a low or negative correlation to the rest of the assets in the portfolio).

I got to thinking: why would anyone want a portfolio that goes, "boing, boing, boing?"

The short answer to that question is, "They don't!"  Nobody WANTS their wealth to be on a roller coaster ride ... yet that is the thrust of the main stream investment world - a "Buy stocks" or "Trade stocks" process that has a lot of action but long term has very little direction - as has been the case with the stock market (and likely your portfolio) the past 10 years.

Of course, the stock broker makes money with this process even if you don't.

Inconvenient Truths

The past month in this blog, we've unveiled a number of inconvenient truths.  The "10% Myth" article proves that historically, stock market returns are closer to 7% than the 10% figure mentioned in the media.  "Fat Tails" explains that average is not normal ... a stock market investor is far more likely to see a horribly bad return than an average return.  "Greed Is" points out that greed is neither a good thing nor a bad thing.  It just "IS."

Every one of these myths was foisted upon the public by the investment community and promoted by the financial media.  They aren't lies as much as they are exaggerations.  One stock broker I know says this is no big deal.  "It's just good marketing."  It puts stock market investing in a favorable light and allows brokerage firms to focus on a narrow and simple business model (get all clients to buy/trade stocks - don't worry about those messy alternatives).

"Boing, boing, boing" looks pretty good - at least you're bouncing around and not just laying there.  If all you know about is a piston engine, then you're happy to have one in your car.

"Boing, boing, boing" looks pretty good ... until you see "Hmmmmmmmmm."

Alternatives - Investment Hmmmmmm

What are these investment alternatives?

They range from real estate investment trusts (REITs) to manage futures, options to Forex money exchanges.  There are many different flavors.  Some are simple, others are quite complicated.  Some correlate well with stock prices, others do not correlate at all.

There are a few common traits among the better alternatives:

Most investment advisors don't understand how they work - you need to work with a true professional - and they are commonly demonized by the main stream financial media as "wildly risky" or "too complicated for traditional investors."  I suspect they are too complicated for traditional stock brokers, but that does not mean they are too complicated for you or my clients.

How Risky Is It ... Really?

The article I was reading in Investment Advisor magazine discusses 'managed futures' a term that conjures up heartburn for the uninitiated (but as the article points out "it is typical to fear what we don't know or understand").  The author then goes on to calculate the riskiness of this investment asset class and finds out that managed futures had a much-less-bad worst month (-8.16%) than the S&P 500 (-16.79%).  The worst draw-down period for the managed futures index was a 15% loss over five months versus a 50.95% loss over 17 months (ending in February 2009) for the S&P 500.

So exactly WHICH asset class is too risky for average investors like you?

And yet the main stream financial media (the main marketing arm to all the brokerage houses, wealth managers and investment advisors) makes investing in the stock market seem glamorous and easy ... and makes out alternatives to be risky and unwise.  In fact, most investment professionals are very surprised to see those numbers - it goes against everything we thought we knew (that just wasn't so).

Smart Investor Plus™

My firm offers the "Smart Investor Plus™" strategy for our investment clients.  It starts with a globally diversified portfolio of stocks, bonds, commodities, real estate and cash.  We then overlay that portfolio with an options strategy - selling options to get in and out of each position.  This is a simple (although not intuitive) strategy that improves average rate of return (because you are being paid premiums to sell the options) and greatly decreases the downside risk.

This is a strategy that goes "Hmmmmmmmm" even when the stock market is going "boing, boing. boing."

What's The Catch

When most people hear about this for the first time, they are concerned.  "Options are risky."  True, some kinds of option strategies can be risky.  This isn't one of those.  Once we explain this strategy to most investors, they understand pretty quickly how it is less risky than a traditional "buy and hope" stock portfolio.

Then their only question is, "Why aren't more people doing this?"

I would have to suspect that the reason is the same one plaguing the Wankel rotary engine.  Most people don't know there is an alternative to the piston engine.  It is typical to fear something that you don't understand.  The makers of piston engines have a vested interest in promoting that fear so they can sell more of their products.  The rotary engine is a threat to market share ... and you are none the wiser to being the pawn in their little game.  You keep on buying piston engines because ... well ... that's what everybody else is doing.  The alternative seems risky.

If you want your wealth to go "Boing, boing, boing" for the next 7-10 years, then stick to your piston engine, all-stock portfolio.  If you want your wealth to go "Hmmmmm," it might be time to look into some alternatives.

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Comments (2)
1 Thursday, 27 May 2010 23:52
I've actually heard of option strategies to lower volatility for most of my life.

The problem as a matter of perception is twofold: 1) people want simple, and 2) simple messages make for better marketing.

The two flow into each other, as the business media touts the same simple message--buy stocks and get rich--again and again, and the public laps it up. The message is a popular one, even in volatile markets. After all, who doesn't want passive riches?
2 Thursday, 03 June 2010 16:45
John D. Buerger, CFP®
Thanks Kevin ...

People DO want simple and simple messages do make for better marketing. Our Smart Investor Plus™ process is simple. You get paid to expose your wealth to risk in the market (and no more risk than normal). I don't think it can be simpler than that which is why this strategy has caught on so well with investors.

The only challenge is that the industry in general finds it a threat to their business model so they go around saying that "options are risky" when, in fact, this is far less risky than what the investment industry does every day.

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Last Updated on Thursday, 27 May 2010 22:47
Flash Crash PDF Print E-mail
Written by John Buerger   

John Buerger

Last week we made a post about Fat Tails and how wild swings in the stock market are the rule, not the exception.  May 6th's "Flash Crash" was a perfect example of that.

This week, I am releasing an email I sent out to all of my clients on that Thursday night where the market dropped almost 1000 points.

Things are set up to see volatility in the markets over the next few months. Hopefully, you have learned from other posts on this website and built up your portfolio allocations across broad global asset classes. That will help temper the storm.

There are additional strategies you can follow that will further insulate your hard earned wealth from the downward potential in the market. One of these actually pays you to ride the roller coaster. While this strategy should only be executed in a professionally managed account (don't try it at home), it has helped a number of my clients sleep better at night, knowing that they are as prepared as possible for the turbulent seas that lie ahead. In fact, they almost look forward to that turbulence, because they know they get paid more the wilder the ride gets.

If you're interested in learning more, I hope you will give me a call and set up an appointment. Sorry, I don't have any classes set up on this strategy yet. In the meantime, I hope that you find the following letter to be of value to you:

Dear Concerned Investor ...

Thursday, May 6, 2010 - 10:45pm

Today was a wild day in the stock market ... It is all over the news and is building a buzz. It was an extraordinary day in many ways. I wanted to touch base with you quickly to offer a little perspective on the news you will hear and the conversations you will undoubtedly be engaged in over the next few days / weeks.

If you have any questions or concerns, I want you to call me. This is the beginning of another rocky section in the investment markets. You cannot escape it. The news will find you. It is better to understand what is going on and know your situation exactly. It will help you sleep at night.

The Greece / Sovereign Debt Issue

The headlines say that the 'Greece' problem is the basic cause of this violent turn in the market. Indeed, Greece's debt issues are probably the spark that started the fire, but the fuel was already there. The conditions were right. It only took the spark to light the firestorm, but now that things are blazin' it will be difficult to put it out.

There is a global sovereign debt issue that has been building for years (if not decades). Greece is in debt up to their eyeballs, true. So is Spain and Portugal. What is worse is that these loans are spread out among European banks who are still weak from the last financial crisis in 2008. If Greece defaults (and I think they will), it will create pain all around Europe. The $140+ billion Europe and the IMF (which US taxpayers support heavily) will throw at Greece is a drop in the bucket. When you look at the debt picture for almost all developed nations, globally we're all messed up.

The truth is we never really addressed any of the root problems that caused the first financial crisis in 2007-2008. In fact, we only exacerbated them while we 'kicked the can down the road' with stimulus patches, bailouts and massive government spending - all in hopes those problems would go away. They haven't. They won't. Eventually we will see them again - only bigger and badder than they were two years ago.

You cannot solve a debt crisis by adding on more debt. It just won't work.

Goofy Trades

The market was in the midst of a relatively orderly (but significant) decline until 2:30pm EDT when some unusual trades were executed. The story is that someone entered an order to sell a billion shares of something when they meant sell a million shares. I don't know that I can believe that one operator error could cause the whole market to implode (the Dow went from -250 to -998 in a matter of minutes). That doesn't pass the smell test to me.

I have spoken today with other advisors and traders, some of whom watch the tape VERY closely. The consensus is that there were many trades that were unusual and it was odd that they were all coordinated in a very short time frame. Others have suggested that some trades today were "slowed" while computerized trading continued at a high-frequency pitch. Those computer trades couldn't find buyers (because of the slowed regular trading) causing the prices to drop like a rock.

I don't really know what happened. I doubt any of us will find out the truth of the matter for years (if ever). I do know that with the severe price swings on many many stocks, a few insiders made a boatload of money buying on that 9% dip. Was the market manipulated? It is possible. Manipulated from inside? That is possible, although there is also the possibility that a computer system was corrupted - an investment version of cyber-terrorism. This is not out of the question, either.

We simply don't know and can't control it.

How We Navigate This

Part of my work as your investment manager is to build an investment portfolio that helps you build wealth in all environments. This strategy is also designed to protect your wealth from down drafts like today, even crazy markets with "fat fingers" and computer trading run a muck. As such, I employ a globally diversified asset allocation approach. Over the past 18 months, I have purposefully and tactically shifted that allocation towards bonds and away from equities.

The result is that my average portfolio of $85,000 lost $700 today. Had it been invested 100% in equities, it would have lost between $2200 and $2800 (depending on how much was in European companies). Now nobody likes to lose money, but investing always comes with risk. My job is partly to immunize the portfolio from as much downside risk as possible and we certainly did OK with that today.

The challenge I have is that the bond-heavy tactical move (which has worked well for 28 years and worked pretty well today) is not going to be a solution as this sovereign debt problem continues to unfold. Interest rates will eventually start to rise and when they do, bond prices (especially on the longer end of the yield curve) will get hammered.

Moving from equities to bonds will be jumping from the frying pan into the fire.

There are solutions to this issue and we have implemented (or are in the process of implementing) them. If you have questions about these strategic adjustments, let me know and I'll be happy to meet and discuss them with you. (note: the strategy alluded to at the beginning of this article is that strategic adjustment)


We are in the early stages of a brewing storm. The news is likely to get worse before it gets better. Greece's debt problems are only the tip of the iceberg. Today's price action in the market was a rare anomaly, although it could happen again. No matter what, it is important to be aware of the risks to which your wealth is exposed. It is also important to keep your head and stick to your financial game plan.

If you have questions or concerns ... call me. If there is one thing I learned in getting through 2008 it is this - communication is the key. It really does make things better for everyone.



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Comments (1)
1 Thursday, 27 May 2010 13:36
John, I think you have a realistic view of what could happen and it sounds like your taking steps to deal with the worst.

Too many people in the investment world put on rose colored glasses and assume the way they've invested for X number of years is the way to go--as long as you hold on long enough.

I don't know where the markets are heading, but you seem to have a good sense of it.

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Last Updated on Thursday, 20 May 2010 04:21
Fat Tails PDF Print E-mail
Written by John Buerger   

John Buerger

This is a follow-up to last week's post about the 10% Myth as we continue to investigate the world of investments.

How do you behave when you don't get what you expect?

Some people can be very rude when reality doesn't match their expectations, especially when they're hungry (I could tell you horror stories from my restaurant days back in Newport, Rhode Island).

But meeting (and exceeding) expectations are the lynch pin of both business and financial success.

What is interesting is that many times, expectations can be completely out of line with reality.  The facts (data) are staring you in the face.  Your expectations were unrealistic, but you still are mad because those expectations were not met.  Bathing suits and middle age come to mind.

This is especially true with investments.

The 10% Myth

Last week we refuted the 10% Myth of the stock market - The average rate of return over the history of the stock market is NOT 10 percent (as is commonly stated by stock brokers and the media pundits on the financial pornography outlets).

The average rate of return on equities is closer to 7% (including dividends).

Now, a 7% historical return is pretty good.  It allows you to double your money in about 10 years, quadruple wealth in 20 and wind up with 8 TIMES your starting wealth after 31 years.  If you are in control of your cash flow and saving money throughout this time, you'll build wealth even faster (a little shameless plug for financial planning and cash flow management).

But what about the next two to three years?  If the average rate of return for the stock market has historically been 7% per year, how likely is it that you'll see something near that rate of return on your investments in any one of the next few years?  How likely is it that you'll see a result that is substantially different from average - a big gain or (worse yet) a huge loss?

Average is Not Normal

The answer is, "The big loss is more likely than the average return!"

Why?  Because annual returns for the stock market are highly volatile, even in time periods where everything else economically seems pretty quiet. We looked at the history of market returns since 1896 and plotted out those results in a distribution bar graph.  Here is what we found:

click on picture for a larger image

The blue line represents all the times that returns for the year were average (between 4% and 8%).  We saw average returns in less than 10% of the periods in the 112 years covered.  A loss of 8% to 12% happened 8% of the time as did a gain of 16-20% or 24-28%.

You would think that the further away from average (the more to the right or left of the blue bar) the less often you would see that kind of result, but it doesn't work that way.

Now I have been an investor since I was in high school.  Still after all those years (my kids would say "centuries") and after having seen the raw data and even the graph above, I still find it difficult to accept that normal returns for my portfolio will be anything BUT average.  But it is true.

What's going on?

Fat Tails and the Human Brain

Human beings are pattern seeking creatures.  In fact, our brains will see patterns where they do not exist.  A number of experiments have been done where participants "identified" patterns in purely random number sequences.  It's a quirk in our hard wiring and a wonderful coping mechanism that serves us well in many ways, just not in the investing world.

When we are told that the stock market has averaged a 7% rate of return over its history, our brains automatically imagine that the results next year will mostly be right around 7% with a very small chance that they will be out of the ordinary.  We develop an expectation on that assumption.

It does not matter that your recent personal experience has seen nothing but wild numbers (as we have seen), the brain still expects a lot of average results and a few outliers - what is referred to as a "bell shaped" distribution curve as represented by the gold line in the following graph:

click on picture for a larger image

The Unexpected

Do you see that really big block on the right?  That represents all the years where there was greater than a 28% gain.  And the big block on the left?  Those are all the times where the market lost more than 16%.  They both represent a pretty wild roller coaster ride ... and they happen a lot ... at least a lot more than "average" returns happen.

We call this a "fat tail" distribution curve as there are a lot of results that are at the "tail end" of the curve.

The thing is that while history is full of examples of years when returns were not average ... most people expect them to BE average.  Your brain wants average to be normal and anything that isn't average is supposed to be rare.  Unfortunately, that means a lot of people are surprised a lot of the time.  That creates stress and (often) poor financial and investment choices.

Fat Tails and Your Wealth

Besides the psychological damage that is done to investors over and over as results don't meet expectations, much of portfolio theory is built on the assumption that the stock market is a "random walk" and follows a traditional, bell-shaped distribution.

This is important to understand the next time the market goes into a tailspin (which it is likely to do again soon) and your investment portfolios and retirement accounts plummet with it.  It isn't anything unusual.  The market isn't punishing you.  The market is acting normal.  Your portfolio and how it is constructed is where the problem is.

Investment Solutions

There are a couple lessons to be learned from all of this.  The first is that your investments are exposed to more risk than you probably realize.  While we have statistics like standard deviation and semi-variance to describe risk, those numbers mean nothing to your psyche. Even if you could really get your head around those numbers, your brain circuitry will most likely discard the feedback and just expect to see the average anyway.

Secondly, most portfolios are put together by advisors who are completely ignorant of tail risk, that it exists or that it could really wreak havoc on your ability to build wealth.  Your portfolio needs to have some kind of hedge against tail risk - at least tail risk to the down side.  That hedge can be in the form of stop loss orders, futures, options or some kind of insurance contract.

Talk to a fiduciary investment professional about what kind of hedges they recommend.  If they recommend global asset allocation, they're better than most advisors but they still could do more to protect your wealth ... and meet your expectations (as unrealistic as those may be from time to time).

Now if you'll excuse me, I have a new bathing suit I want to try on.

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Comments (2)
1 Wednesday, 12 May 2010 14:46
Brett Anderson
Thank you for the very good piece. I'm trying to reconcile the graph above: you note that "A loss of 8% to 12% happened 8% of the time as did a gain of 16-20% or 24-28%", however the bars for those various returns look to be of very different lengths. And the vertical axis is a 0-100 scale versus a percentage-of-time-scale. I know I'm missing something, just need to know what!? Thanks again.
2 Thursday, 03 June 2010 16:43
John D. Buerger, CFP®
Hi Brett -

Thanks for the comment. The vertical axis represents the number of occurrences in the sample. There were about 440 data points in the sample. Each of the result marks mentioned showed 31-35 instances. Note that I did not include the 20-24% gain in that note since there were only 20 instances of that result. Hope this helps.

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Last Updated on Wednesday, 12 May 2010 01:32
The 10% Myth PDF Print E-mail
Written by John Buerger   

John Buerger

Did you ever tell somebody that Santa Claus doesn't exist?

I mean, it is the truth and all and we all find out about it in some way, but were you ever the one to deliver the news straight out?

That is the role I get to play today - but this reality check isn't about Santa Claus.  It is about something that makes people feel almost as good, though.  This myth revolves around your money and the kinds of returns you can expect out of many years invested in the stock market.

I call it the 10% Myth and it goes something like this:

The Stock Market has, on average, made about 10% returns.

Although promoters of this myth never say it (that would be illegal - past results are no indication of future performance), the message most people hear is:

Invest in stocks today, and YOU can make 10% returns, too!

This is usually followed up with wet-noodle scolding by the stock broker if you happen to own bonds, CD's or (God-forbid) annuities.  Why would you want to get a measly 4-5% return, when you can have 10%. You'll double your money faster with stocks (7 years as opposed to 15).  You'll be rolling in the dough.  You can retire early!!!  Just take a little risk!

Can you feel the dopamine rush starting to cascade from your brain as you anticipate finally getting out of the rat race and living the high life?  It feels really good!  And all you need to make it happen is some stocks and a long enough time-table to mitigate the risk (another myth for a later day).

No Virginia, There Is No Santa Claus

(At least, not on Wall Street)

It would be great ... but it simply is not true, at least not consistently.

Sure, there have been 10-year (and even a few 20-year) periods where the stock market has done better than 10%.  We went back (to 1896) and looked at all the data on the Dow 30 Industrials and found out that the market did better than 10% returns (before inflation) about 22% of the time.  When you look at 20-year periods, a long term 10% return happened only 10% of the time.

So maybe there is a Santa Claus, but he only shows up on one out of every 10 Christmas Eves.

There are probably some stock brokers who are devout Santa peddlers who will point out that this data does not include dividends and true, it does not.  This data also does not include inflation which counters the dividend effect.  But even if you include a generous dividend effect of 3% and still ignore inflation, the 10% story is only true one third of the time.

The Real Number - 7%

So if the equities markets are NOT generating 10% rates of return, what is the truth?

The real number (before inflation) is pretty close to 7% ... and that is over the history of the stock market.  We crunched the data for the Dow Jones 30 since 1896 and the S&P 500 since 1928.  It didn't really matter which index we used or even when we started or stopped.  Once you get out to 40-50 years (longer than you or I will be investing), the average rate of return is the equivalent to buying a CD with a 7% interest payment ...

... but with a boatload more risk.

Tough Choices

I am telling you this for one reason and one reason only - I want you to know the truth.

When you can get your head around 7% (not 10%) as being a reasonably accurate estimate of how quickly your money can grow (and THAT is still by taking on a whole lot of risk), it might change how you view each of your options for getting a return on your investments.

Knowing that equities earn, on average 7% (including dividends but before inflation), you might make smarter choices with your money.

Millions of Americans were heavily invested in equities within 5-10 years of retirement.  When their portfolios blew up in 2008 they were faced with a new choice: "Keep working 5-10 more years longer than I planned" or "Enjoy a severely diminished lifestyle for the rest of my life."

They were faced with that choice because they were NOT aware of the risks they were taking with their investments.  All they could see were those 10% returns they wanted to get.  It didn't help that the previous 10 and 20 year cycles HAD seen 10% returns.  That just made them more willing to believe the myth and plan their finances accordingly.

What Now? - Solutions

I present issues (problems, threats, etc.) like this because you need to be aware that they are out there.  Going through life blissfully ignorant of risk is a recipe for disaster.  You don't walk out into a snow storm without a jacket, boots and gloves.  Don't walk into a hostile investment environment unprepared, either.

What are the preparations you should make?

(a) Build Wealth Through Cash Flow - Striving for 10% returns comes with a tremendous amount of downside risk.  Aim lower.  Shoot for inflation plus 4 or inflation plus 5 and you're far more likely to hit it.  That will likely mean that you will need to save more and spend less.  That's not such a bad idea, anyway.  You can build a lot more wealth more quickly through cash flow management than you can through any investment strategy.  Ask me about our Cash Flow Hydrant™ cash management tool.

(b) Diversify across broad asset classes - A portfolio of 500 US stocks is well diversified (you own 500 different companies), but it is not diversified across asset classes.  Buy stocks, bonds and commodities.  Spread your investments as much as you can across the globe.  Buy local, international and even developing markets.  A globally diversified portfolio started in early 2008 is actually up 10-15% from where it started.  The S&P 500 is down 10%.  Real estate is down 35%.

(c) Don't be afraid of other types of investment vehicles - There is a place in your life for insurance products like annuities and cash value life insurance when they are structured properly.  Mind you, insurance products are "sold" and agents are paid commissions.  Be careful.  Most of the time, the product is constructed in such a way to benefit the agent more than the client.  That doesn't make the product bad ... it just means you may be buying a lot of stuff you don't need.

(d) Learn about more advanced strategies - IF you already understand and have implemented a globally diversified portfolio using low cost index ETF's and mutual funds (most portfolios I review for new clients are not even advanced to this level), then you can start learning about options and futures strategies to improve returns while eliminating risk.

No More Santa Peddlers

The 10% Myth was originally promoted by the big stock brokerage firms.  If your stock broker, money manager or "financial advisor" promotes the 10% Myth ... it's time for a new relationship with a different advisor.  You might start with a fiduciary advisor who holds themselves to the ethical responsibility to do what is YOUR best interests first.  You also might want to work with someone who understands strategies that are a little more sophisticated than "buy stocks for the long haul."

My last suggestion is usually my first suggestion:


The financial media are all peddling something - advertisements.  Those ads are being paid for by the big stock brokerage firms.  Every time you see Jim Cramer pound the table telling you to "Buy, Buy, Buy" he is only doing what he can to get you to generate a financial product transaction.  It is that transaction that puts profits into the brokerage companies which, in turn, pays for the advertising which, in turn, pays Jim Cramer's salary.

He has no fiduciary duty to you.

The financial pornography business is all about titillation - They want you to feel that dopamine rush in anticipation of huge gains you hope to get (because they show you how everybody else is getting them - even when they're not).  What you see on CNBC and MSNBC and Bloomberg News is theater ... designed to excite you and get you to think emotionally about your investments.  But emotions are the reason most investors under perform the market by 6-7% (Dalbar studies).

The next time you see Jim Cramer pound the desk and yell, "Buy, Buy, Buy!" turn off the TV and tell him, "Bye, Bye, Bye!"

Then go watch a movie like "Miracle on 42nd Street."  It's still a myth, but it is a lot less dangerous to your financial future.

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Comments (2)
1 Thursday, 03 June 2010 14:54
Joe DeGroff
Excellent post, John. America's love affair with Rate of Return has to be put into check! I will retweet this!

2 Thursday, 03 June 2010 16:50
John D. Buerger, CFP®
Thanks for the retweets, Joe. America is in love with RoR (Rate of Return) because we're all emotional creatures and RoR is a marketing message that works. I'm actually all for a target rate of return. Just understand that more return means more risk and a better chance of coming up with less than you expected ... oh yes, and this silliness of trying to beat the market has to stop.

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Last Updated on Monday, 03 May 2010 23:35
My Why PDF Print E-mail
Written by John Buerger   

John Buerger

Why do YOU do the work you do?

This is an important question because your "Why" usually is the determining factor in your "How Much" ... as in how much you apply yourself to your work, how much value you create through your work and consequently how much money you make in payment for your work.

The stronger your "Why" ... the better your "How Much."

"The secret of success is making your vocation your vacation." - Mark Twain

We all love a good vacation.  If you can get your work to stir the same emotional response that comes with your greatest vacation memories, you will naturally find yourself enjoying life more every day.  Your happiness has more to do with mindset than anything (see my blog post on SHIFT).

This week's blog post is a little more personal than usual as I want to share my "Why" and more generally, the "Why" of the elite Fiduciary Financial Planner (as opposed to the much-more-common financial salesperson).

The Ultimate Litmus Test

"I was able to sleep through the night last night for the first time in years!"

Frankly, I would rather that people NEVER had the problem where their financial situation kept them awake at night, but sadly sleepless nights and general financial worrying are the primary symptoms of personal finance in today's society - a condition that is not limited to folks based on their income or current savings.

Financial worries are an equal opportunity offender.

You can have a lot of income and hundreds of thousands (or millions) of dollars in investment accounts or you can have below average income and no money saved at all.  It really doesn't matter.  You can be male or female, professional or a blue-collar worker, well educated or not. Financial worries strike all types of people from all walks of life.

"I was able to sleep through the night last night for the first time in years!"

The person who I'm quoting here told me this just days after our very first meeting.  Their case was pretty average - a little below average income and approaching retirement, some savings (no where near enough but more than many people), home, mortgage and other bills.  All of these issues combined left her in a constant state of anxiety.

The solution that gave her the first sleep-filled night in years had nothing to do with a budget and very little to do with how her savings were invested.  The solution was not a product or even a piece of paper with a written plan.  What made the difference was how she viewed her own situation - the beginnings of a new "framework" and the process of thinking about her money differently.  Once she understood her personal finances (the good and the bad) and had some ideas as to solutions for her particular situation that would work, the worrying just went away and she started to focus on the incremental tasks she needed to perform to fix her problems.

Are these people out of the woods?  No way!  Is their situation manageable?  Absolutely!  Actually, their situation was always manageable ... they just had no idea HOW to manage it or even confidence in the fact that it WAS manageable.

This is a good start - but it is not the end of the story.

Process Not Product

Just like the medical community that pitches a purple pill, or a type of surgery or treatment as the solution to all medical maladies, financial advisors promote products as the solution to all of your money problems.  That product can be an insurance policy, a mutual fund, a contribution to an IRA, a legal document (like a trust or incorporation papers) ... OR EVEN A FINANCIAL PLAN.

But each of these products only treats a symptom of (financial) pain.  To get rid of that pain for good means making a SHIFT in your choices.  If you are fat, you need to consume fewer carbs.  If you are in pain, you may need to change how you walk or sit or move your head.  If you are broke, you have to change how you think about money and where you spend the dollars that you have.

I cannot emphasize enough that the financial plan - that strategy that we put together and the written document you should receive - is NOT the end solution.  It is the process that follows that matters.  While you may get rid of those sleepless nights for awhile, the worries and struggles will return if you don't make the SHIFT to a new way of thinking about your money.  Without that SHIFT, you'll make the same choices you've always made and continue to "enjoy" the same (crappy) results.

Carl Richards, one of the great, forward-thinkers in the financial planning industry points out that a financial plan (like any plan for business, finances, sporting games or even air flight) is based on assumptions.  Those assumptions are based on past experience and are almost assured to be wrong in the future.  (Read Carl's article in the New York Times)

A good plan is not set in stone.  It is fluid and can easily be adjusted for changes that you will encounter.  As Carl points out:

Think of this as the difference between a flight plan and the actual flight. Flight plans are really just the pilot’s best guess about things like the weather. No matter how much time the pilot spends planning, things don’t always go according to the plan.

In fact, I bet they rarely go just the way the pilot planned. There are just too many variables. So while the plan is important, the key to arriving safely is the pilot’s ability to make the small and consistent course corrections. It is about the course corrections, not the plan.

It is about the course corrections ... not the plan!

It is about the process ... not the product.

A New FrameWork - Useful, Not Perfect

I prefer to look at a financial plan as a "framework" through which you can view your financial situation each day - not unlike a good pair of night goggles in a place where there is no moonlight and no electricity so there is very little ambient light.

You're fumbling around in the dark with the tools you are given - touch (limited by the length of your arms), sound (useful but easily misguided), smell (not always even useful) and sight (useless unless you have those night goggles).

Working with a fiduciary professional turns on the night goggles and allows you to see details in your surrounding environment about which you could only guess before.  It does also have it's limitations.  You can't see color very well (just light and dark) and you have very little peripheral vision so it is easy to be blindsided unless you pay attention to the other sensory data.

Clearly, life in this situation is better with the night goggles than it is without them ... but there is still lots of room for improvement.

The Fiduciary Advisor's Why

Last week I had the chance to meet with a few other fiduciary financial planners in our area.  While each of us has a completely different outlook and emphasis to our business, we all share some common traits:

--- We always put our client's best interests ahead of our own because it feels right to do so.

--- We all agree that planning is an ongoing process ... not a one-time product ... and a process we enjoy being a part of.

--- We also all enjoy being a part of our client's growth and prosperity - forging strong relationships with people we like to be around.

Being a good fiduciary financial advisor is something for which only a few people are cut out to do.  It requires refined analytical skills; mastery of reams of data, laws, tax rules and product types; objectivity; compassion; the ability to connect with people at their level and get around their prejudices and misinformed perspectives without getting into an argument.  It also requires a good understanding of human psychology and motivation - because the results are only as good as the implementation of the strategy by the client (and the adjustments along the way).

Clearly, there are plenty of people in this business who have no need or desire to forge the deep kind of relationship I enjoy with my clients.  Sadly, these "advisors" still can make very good money by selling products that are doomed to fail, so they stay in the business and continue to force their wares upon an unsuspecting public.  Buyer beware!

Because of how this system is set up, and the sheer number of sales-oriented "advisors" in the business, the odds of your finding one who can actually take you to the next level are pretty low.  There are more than 600,000 people registered to sell financial products.  There are only 50,000 of us who adhere to the fiduciary standard ... and not all of them seek to help people at the level I have just described.

But for those elite few who do this for the reasons I have just outlined, there is nothing better than to hear a client say, "I had no idea how good it could feel" or "I am so relieved" or just a sincere "Thank You."  Heck, I get a huge kick out of just seeing their demeanor change, the sparkle return in their eyes or a big smile and a hug.

It makes my vocation a great vacation ... every day!

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Last Updated on Tuesday, 23 March 2010 20:33
This is SHIFT! PDF Print E-mail
Written by John Buerger   

John Buerger

This is a WIWEK - What I Wish Everyone Knew.  I've been a financial planner for eight years.  I have thousands of hours of education and many times that of experience in helping people making smarter choices with their money.  This is one of many rules of personal finance that I wish everyone knew, but most don't.  We don't teach this in schools.  There are also too many people who make too much money when you don't know this stuff.  I hope this post helps you.

Today I'm going to share a nugget of golden truth ... but I seriously doubt you're ready to hear it much less apply it to your life.

That may seem like a cold and pessimistic comment from your friendly, warm and optimistic Wealth Coach but the figures set up the story:

According to the Social Security Administration ...
Fewer than 5% of Americans will EVER achieve financial freedom.

This isn't anything new.  It has been going on for decades ... probably centuries ... and this issue cuts across race, religion, economic theory, geography and politics:

There have always been the few that "have" and the many that "have not."

Some systems have more "haves" and fewer "have nots" but there will always be that division and there will always be a sizable majority of "have nots."  The quality of life for those "have nots" is certainly an issue and I believe some systems (like capitalism) provide a much better existence for those on the lower end of the wealth spectrum than any other alternatives, but this is not a debate we will cover here.

My nugget of golden truth is aimed at those who are currently in the "have not" category and want to be in the "have" category.  For you there is more than just hope.  There is abundant opportunity.  You can live a life of personal freedom, joy and abundance in every day.  You can do everything in life that is truly important to you.

You simply must accept and embrace a simple golden nugget of truth ... but I still bet that most of you won't.

Here is that Golden Nugget WIWEK:

No Hand-Outs.  No Freebies - It's Up To You

That's it.

Thanks for reading ... but I told you that you probably wouldn't want to hear it.

You might want to argue with me about this.  You might want to blame someone else or rest your existence (as wonderful or miserable as it is) on chance ... but the reality is that YOU (and more precisely - your thinking) drive EVERYTHING in your life - personally and financially.

For every tragedy in your life, I can show you an example of someone who has taken those same circumstances (or worse) and done something positive with them.  Don't make enough money?  There are dozens of people who make half of what you do and are living lives that are full of meaning, love, joy, value and happiness.

No pity parties here.

Meanwhile, the lottery winnings rosters are littered with a huge percentage of people who won the big "jackpot" in life only to have lost it all (which is worse than never having had it in the first place).

It's All About SHIFT

Mindset is everything.

How you think about money.  How you think about yourself.  How you think about others.  That is all that matters.  Remember the old phrase:

If you keep on doing what you've always done ...
... You'll keep on getting what you've already got.

That phrase needs an update ... It should be:

If you keep on THINKING what you've always THOUGHT ...
... You'll keep on getting what you've already got.

You must be ready to SHIFT your thinking ... before you are ever going to be ready to enjoy better results.  In fact, that SHIFT in your thinking starts with being ready to enjoy the results you already have (even if they aren't as good as you like).  Only then will newer, better and more enjoyable results start cropping up.

That's really important so let me repeat it:

The SHIFT in your thinking
starts with being ready to enjoy the results you already have.

How This Applies to Your Wealth

When I started out as a financial planner seven years ago, I quickly came face to face with a frustrating reality - most people who came in for financial planning advice were not ready to take it.  As a result, they didn't act upon the advice they received and as a result they never saw any changes in their financial situation.  And it wasn't just me.  Two thirds of all financial plans end up doing nothing more than collecting dust in a leather binder.

I've learned how to identify most of these people.  They come in looking for a product or investment to solve their problems much like the patient who walks into the doctor and says, "just prescribe me something and I'll be fine."  I won't work with these people - it's a waste of their money and my time (which I'd rather spend with my family).

I've seen other cases where the individual wanted to fix their life.  They acted as if they were committed to the process.  They took good notes and asked all the right questions.  They tried following the steps in their strategy, but because they weren't willing to SHIFT their thinking (how they related to money, what they thought about themselves, what were their priorities in life) they found themselves in situations where "things just came up" and sabotaged their efforts.

The truth is that their own thinking is what sabotaged their efforts.

That statistic from the Social Security Administration is the way it is ... not because the system is rigged and you don't have a chance.  You weren't born to be a failure any more than you were born to be a success.  That statistic is true because most people refuse to SHIFT their thinking (or let go enough to get help from someone else in shifting their thinking) ... and until you SHIFT your thinking, you'll keep getting the same results!

My Challenge to You

At the beginning of this post I laid down the gauntlet.

I challenged you that I doubted you were ready to hear this nugget of truth much less apply it to your life.  Let's see what you're made of (which is, by the way, a lot more than the majority of people who won't even make it this deep into a blog post)...

FIRST CHALLENGE - Send a link to this article to your friends ... all of them.  Ask them to read the WHOLE article and then check back with you to discuss it.  Start a conversation based on these questions:

--- Do you agree that a SHIFT is necessary to create change in your life?

--- Have you ever said anything demeaning about yourself especially when it comes to money?

--- Which type of person are you today - the type that is in control of their lives ... or the type that lets life hit them in the face and hopes they get through it OK?  Seriously, there are only two types and no gray areas.  You are either one or the other.

SECOND CHALLENGE - Post any comments right here on this blog. If you agree, then your support is appreciated. If you disagree, formulate your argument.  As long as it is written in a respectful tone, it will remain up on the site.  If you've had insights from reading this article, share them with the rest of us.  Whatever the case.  Be a part of the dialog.

FINAL CHALLENGE (only for the truly brave) - Sign up for a Wealth Health Check-Up (follow the link - http://tr.im/whckup - for more information and sign up by sending me an email at jdbuerger@altuswealth or calling me at 805-476-0333). 

Before we ever meet you will be given a free financial data organizer and free access to a web-based financial planning tool for 21 days.  The process of getting your data together will add tremendous clarity to you regarding your current financial condition.  The meeting with me will last two hours, can be done anywhere there is high-speed web access, will answer your most pressing financial questions and comes with a money-back guarantee.

I'll warn you ... in the past two years I have sent out hundreds of financial organizers and connected those people up to our web-based planning software for them to enter their information.  Only a small percentage (oddly enough - about 5%) have ever made it past that first stage to go through with the meeting.  The process weeds out the 95% who are doomed to keep their thinking just the way it is ... and enjoy the same (crappy) results they have endured all along.

It's your choice.  The ball is now in your court.

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Last Updated on Tuesday, 16 March 2010 23:21
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