Temperament over Intellect

Warren Buffett once said, “The most important quality for an investor is temperament not intellect.”

Investors very often buy at high prices when the market is hot and attractive, and sell at low prices after observing periods of poor performance.

This leads average investors to severely trail both the S&P 500 index and the Barclays Aggregate Bond Index over long time periods.  This is why investors are very often their own worst enemy.

CBS MoneyWatch author Larry Swedroe recommends in a recent article that you ask yourself if you believe that you’re best served by being your own advisor:

  • Do I have the temperament and the emotional discipline needed to adhere to a plan in the face of the many crises I will almost certainly face?
  • Am I confident that I have the fortitude to withstand a severe drop in the value of my portfolio without panicking?
  • Will I be able to re-balance back to my target allocations (keeping my head while most others are losing theirs), buying more stocks when the light at the end of the tunnel seems to be a truck coming the other way?

 

Weekly Market Review ~ Friday, 04/13/12

On Monday, stocks experienced a fourth consecutive day of losses as fall-out from the disappointing US jobs report the previous Friday manifested itself after the market holiday. The decline snowballed on Tuesday, with the Dow sliding over 200 points, as investors wonder how much longer the 2012 rally can last. On Wednesday, the slump finally ended on a very good start to the first quarter earnings season by Alcoa. The market roared back on Thursday on renewed expectations that the Fed might try to stimulate the economy with additional quantitative easing. Stocks closed the week on Friday on a down note with another triple digit loss for the Dow, this decline spurred by reports of a slowing economy in China.

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“Shelf-Space” – Another dirty little secret about big brokerage firms

Cereal companies pay grocery stores to place their products at eye level on the shelves.  Higher visibility leads to higher sales.

Mutual funds do the same thing.  They pay big brokerage firms big money to tout their products.  So when you call up a firm like UBS or Morgan Stanley Smith Barney and ask for an investment recommendation, they have a list of preferred mutual funds that they want you to buy so they can make more money.

These “revenue sharing” payments can be very big revenue sources for brokerage firms.  For example, nearly one-third (33%) of Edwards Jones’ $481.8 million profit in 2011 came from “revenue sharing” fees.  Note that Edwards Jones is forced to disclose more information on sensitive matters like this than its competitors thanks to a 2004 regulatory settlement.

Though “revenue sharing” payments are legal, many critics question if they are ethical since it calls into question whether recommendations are based solely on what’s in the best interest of the client.  Brokerages are not fiduciaries and have no requirement to put client’s interests first.

“It’s an unholy alliance between mutual-fund firms and brokerages to exploit their customers,” says John Freeman, emeritus professor of business and professional ethics at the University of South Carolina Law School.

Investors who want to avoid questionable practices like “shelf space” and “revenue sharing” should seek advice from a fiduciary such as a registered investment advisor.

source:
Wall Street Journal: Brokers Raise Fees, but Not For Investors: Why You Should Care

Weekly Market Review ~ Friday, 04/06/12

The upward trek of the markets continued on Monday, as the Dow logged its highest close since December 2007 on positive manufacturing and employment news. On Tuesday, stocks fell modestly when Fed Chair Bernanke failed to indicate that any economic stimulus was in the works. The US markets followed the European markets down on Wednesday following a disappointing Spanish bond auction. The major indexes ended the holiday-shortened week on Thursday mixed, with the tech heavy NASDAQ recording a gain while most of the other indexes experienced a modest loss. US markets were closed on Friday in observance of Good Friday.

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2011 IRA Contribution Reminder

Here’s an important reminder if you have an individual retirement account (IRA) or are considering opening an IRA.

2011 contributions to your IRA accounts can still be made up through April 17th.

Maximum Annual Contributions (IRAs and Roth IRAs only):

• $5,000 for tax year 2011
• Age 50+: Catch up contributions of an additional $1,000

Weekly Market Review ~ Friday, 03/30/12

The major indexes gained more than one percent on Monday following remarks by Fed Chair Ben Bernanke that low interest rates will most likely remain for the foreseeable future to combat high unemployment. The S&P 500 hit a 4-year high. On Tuesday, the upward momentum could not be maintained despite expected consumer confidence and home price reports, as stock prices slid moderately. The slide continued on Wednesday as a US durable goods report failed to live up to expectations that the US economy is recovering. On Thursday, the indexes finished mixed as a revised US GDP report for the fourth quarter of 2011 failed to inspire buyers. Stocks closed the week and the first quarter of 2012 on Friday on another upnote, as the Dow finished Q1 with an 8.1% gain, its largest first quarter gain of a year since 1998. The tech-heavy NASDAQ recorded a 19% first quarter gain, its highest since 1991. The S&P 500 logged a 12% gain.

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Complex Annuities See Surging Sales ~ Investors Should Beware

An “indexed annuity” is a complex, high-cost, and illiquid financial product. They pay interest based on the performance of stock and bond market indexes.  Insurers guarantee buyers will not lose their principal, but they require investors to lock-up their capital for long periods, often more than a decade.

Indexed annuities are very popular with insurance salespeople because they are a high commission product.  Insurance agents can get an up-front payoff of 12% or more of the invested amount simply by making the sale.  The accompanying chart demonstrates the sales of indexed annuities have surged in the past decade.

Investor protection agencies and authorities are very concerned about abuse and fraudulent activity around annuities sales.  Former California insurance commissioner Steve Pozner warned that agents “who steal from vulnerable seniors will not get away with their shameful tricks.” 

Weekly Market Review ~ Friday, 03/23/12

On Monday, the markets finish positive following news that Apple will give a a $2.65/share dividend, as well as buy back $10 billion in shares. US home builders’ confidence also hit a five-year high, signaling that faith in the housing market may be returning. These gains were surrendered on Tuesday on concerns that China’s economy may be slowing. On Wednesday, another modest loss followed from news that existing home sales had dipped unexpectedly. Disappointing European and Chinese manufacturing reports sent the Dow to a third consecutive loss on Thursday. On Friday, the markets rebounded despite US new homes sales falling for the second month in a row. Still, the Dow and S&P 500 finished with their largest weekly loss of 2012.

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