I recently met with a prosperous couple, each well-employed and contemplating retirement. They have children that are grown, a house that is paid for, a combined income around $150,000, and employer 401(k)s exceeding $1,000,000. They don’t have an extravagant lifestyle, but see the best years of their lives in plain view. The last thing they want to do is speculate in the stock market, because the stock portions of their 401(k)s have languished and the economic news is frightening. Principle preservation is their primary concern. A safe portfolio of bond mutual funds and annuities sounds right to them.
This financial plan resonates with just about everyone who is retired or thinking about it. A reasonable rate of return with principle protection is doable and worry-free, right? Well, as in most circumstances, perception and reality often take different paths. First, let’s do the math and compare their working income to their potential retirement income at various rates of return: (more…)
In one episode of the hilariously funny 1990’s sitcom Seinfeld, George Costanza, a slightly overweight, balding, unemployed and self absorbed 30 something, decides to make a change in his life. He concludes that he should try to do the opposite of his every idea and instinct. Immediately, things begin to go his way; a girlfriend, a job with the Yankees and moving out of his parent’s house (a real achievement if you know the character). Although George Costanza hardly represents a beacon of financial acumen, the history of the markets suggests that “doing the opposite”, zigging when others are zagging, can actually work. Conversely, if you are content to take the tried and true paths of others, in your best case scenario you may wind up equal to the pack and have achieved nothing more than the overall market average.
The dictionary defines a contrarian as a person who takes an unpopular position opposite to that of the majority. A contrarian investor believes crowd behavior among investors can lead to exploitable mispricing of securities. For example, widespread pessimism about a stock can drive a price so low that it overstates the company’s risks and understates its positive prospects. Widespread optimism, conversely, can lead to speculative bubbles with unjustifiably high valuations. The Dutch tulip mania is a well known example of wild speculation. Contrarian investing is related to value investing in that overwhelmingly negative sentiment can give rise to what Benjamin Graham famously called a “margin of safety” when purchasing stocks, essentially the ability to purchase earnings and income at a discount to their intrinsic value. Arguably, that “margin of safety” is more likely to exist when a stock has fallen a great deal and is usually accompanied by negative news and general pessimism. (more…)
Every investor should strive to achieve the largest possible return on investment given a certain tolerance for risk. Although this axiom seems obvious, during periods of economic turbulence it is critical to focus on the risk side of the equation. How safe is the principal value of my account? Am I well positioned to weather a market correction and rebound fully when the investment climate turns favorable? Intellectually, we understand that long term appreciation and income are equally important. But, as markets fluctuate, falling prices can blur the investor’s vision and raise the question: Is my money safe?
Our current economic difficulties stem from the financial crisis that began in 2008, when consumers, financial institutions and businesses recognized the dangers of the explosion of debt that accompanied the “housing bubble.” Not surprisingly, investors raced to the sidelines seeking safety for virtually every financial asset. Today we are replaying a different (more…)
It’s difficult to read the financial news these days without noticing some storm clouds on the horizon. European debt woes, budget shortfalls everywhere, a lackluster economic outlook and falling home values represent a few of the problems the world will grapple with for the foreseeable future. Such uncertainty poses risk for all investments and contributes to the volatility in the market value of securities. On occasion, the volatility can feed on itself and lead to outright fear. Time and again, history has proven that at any single point in time markets are often far from rational and subject to the very real human emotions of fear and greed. We’ve seen exuberance and greed abound in market “bubbles” such as the internet and technology craze and numerous housing booms. Such excess has always been followed by “busts,” which is nature’s way of restoring balance. The good news is that eventually markets do find equilibrium and over the long haul sanity prevails. The absolute truth of the matter is that no one (more…)
This summer marks my thirtieth anniversary in the financial service industry, beginning at the old Maryland National Bank and ultimately as a senior executive at Ferris, Baker Watts. These two proud institutions, along with countless others, became victims to the ever changing landscape of the industry. Today, “Wall Street” and, in fact, the world’s financial system are dominated by comparatively few investment factories that offer every conceivable alternative investment and access to capital that was unthinkable thirty years ago. Such “progress” has paralleled the dynamic growth of the whole economy and contributed to the advances in our standard of living. Although it would be difficult to argue that we haven’t progressed, does that mean that we have greater clarity about the future? Has innovation and sophistication led to superior investment performance? Are the financial decisions we face any simpler or easier? The answer to these questions is a resounding no.
Placing client interests first is the critical challenge in our industry. (more…)
