Greath Wealth -Investment Information & Services

Your Personal Investment Strategy Wrap Up Summary

Everyone,

Thank you for staying tuned and please excuse me for taking a few days off.  I tried to write yesterday, but I couldn’t get an adequate lake-side wireless connection through my 3G wireless card, so I’m writing from the inside of a Starbucks in Tyler, TX today.

Today I’ll be brief, as I just want to provide a summary of the topics we discussed in April and May.

1. The Three Factor Model.  Keep in mind that three things explain approximately 90 percent of your portfolio’s performance.  These three things are:  (a) the return of the general stock market minus the risk free return; i.e., stocks vs bonds;  (b) large stocks vs small stocks; and (c) value stocks vs growth stocks.  Keep in mind that NONE of the touted commercial sales factors, like portfolio manager, mutual fund company, market timing, etc. come anywhere close to the above three factors when it comes to explaining what impacts your portfolio’s performance.  Code word:  Focus on the three factors above.
2. The Global Economy Marches On.  Economic cycles are as old as commerce itself.  However, in general, and it’s a strong general, you drive the economy forward by going to work every day and making a living.  No one in the free world, and much of the third world, works for absolutely nothing.  Countries and societies rise and fall, but we don’t sail around the world in wood ships any longer.  Code word:  It’s a pretty safe bet that the global economy will continue with its forward march.  It’s wired into our souls.
3. Own the Casino Instead of Just Being a Player at the Casino.  No one is clairvoyant, and when it comes to investing, statistics is a factor.  Code word:  Use the things we’ve discussed to play the game as the owner of the casino instead of a player at the casino.
4. Risk:  We Can Measure It and Design for It.  Do you remember the bell curves?  If we define risk as uncertainty, we can measure it.  Moreover, we can evaluate your personal risk tolerance and time horizon, and then tailor a portfolio for what fits your personal situation.  Hence, rather than rely on non-existent clairvoyance and increase your risk by jumping in and out of the market, you’ll be ahead to get into a portfolio tailored for your situation and ride out the inevitable ups and downs of the markets.  Code word:  Don’t shoot from the hip when you can measure and design for something critical.
5. The Past Doesn’t Predict the Future.  Do you remember the comparison of 1970 – 80 mutual fund superstars to their performance in 1980 – 90?  While past performance may be an indication of future performance in many of life’s arenas, it means next to nothing when it comes to managed investment portfolios.  Code word:  Don’t let any mutual fund company convince that their ABC fund will do good the next ten years because it drummed the market in the last ten years.
6. The Market is Efficient.  As Fama hypothesized in 1965, the market processes and adjusts for all publicly available information almost instantaneously, and its movements follow a random walk pattern.  One measure of the validity of his hypothesis is the performance of index funds versus managed funds.  Code word:  Index funds have a better return, lower risk and lower cost than managed funds.  Those are things we like.
7. Design Your Portfolio.  While we didn’t give this issue the time it truly deserves, you can build a portfolio like a master chef measures and mixes his/her ingredients.  Why leave something as important as your life savings to random chance?  Get into a portfolio that’s optimally designed and built for your risk tolerance, time horizon and investment options.  Code word:  It’s possible to get more return with equal or less risk.  That’s good.
8. Investment pecking order.  We can get one step more scientific than index funds with DFA.  Past performance doesn’t predict future performance, but we do know that DFA funds are more scientifically built than index funds and that their historical performance does more than pay for the additional overhead.  However, if DFA isn’t available or if you don’t want to go that route, a portfolio of index funds is the next best option.  Bringing up the rear of the field is managed funds, but they’re often what someone has to live with because they’re ~90 percent of the market.  But even with managed funds we can apply the three factor model, dial in the risk and design a portfolio that uses efficient frontier optimization.  Code word:  Do the best you can with what you have available.

Although I’m at family camp this week, I’ll continue to blog.  Further, I plan to get back to doing it on a daily basis when we return to Houston next week.  Stay tuned, as more good stuff will follow.

Thanks,

Rod