photos courtesy of Gary Morrison

I read recently that Warren Buffett’s Berkshire Hathaway second quarter profit fell 40% as some bets he made on stock market futures didn’t pay off. He also sold shares in ConocoPhillips in the second quarter because he said he made a mistake in buying them in 2008 when oil shares peaked.

So if the “Wizard of Omaha”, the man whom the media (and many investors) fawn over, makes mistakes picking short-term market directions and individual stocks, what chance do you and I have to make the right guess with our investments? Seems to me the chances are really low.  So why bother?  You’ll have more investment success creating a well-diversified portfolio of stock and bond indexes and sticking with them rather than trying to be your own “Wizard of Anywhere”.

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Key to investment success?

by Steve on August 17, 2010

Sam Mamudi penned a very insightful and thoughtful article for MarketWatch that points out the huge role that luck plays in investment success. I highly recommend the article because it presents several important ideas that every investor needs to know:

There is randomness in investment returns and no one can anticipate what will happen next with investment markets with any regularity; the article has some amazing statistics about the value of a portfolio after various 30 year periods (about how long most of have to save for retirement).

We tend to over-estimate our own investment skill — when something bad happens to our portfolio, we blame it on “the markets” or the banks or the Chinese; when something good happens with our investments, we think we’re a genius.

Therefore, an investor needs to worry about the things we can control: how much we save, how early we start saving, our portfolio diversification, choosing low cost index funds as our securities.

We are our own worst enemy when it comes to our health and our investments. Even though we know we’re supposed to rebalance our portfolio regularly, we don’t; even though we know we should save automatically, we don’t.

Check out the full article and see what insights you gain into your investment behaviors. Good article worth reading.

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Best investment asset class by decade

July 22, 2010

A client recently sent me a summary of research done by Fidelity Investments that showed the best performing asset class by decade (thanks David R.). Using average annual return from 1930 through 2009, here are the best asset classes:
1930’s                     Investment grade bonds                   5.4%
1940’s                     U.S. small cap stocks                    20.7%
1950’s                     U.S. large cap stocks                     19.4%
1960’s                      U.S. small [...]

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Vanguard’s outlook offers some surprises

July 20, 2010

I’m an un-abashed Vanguard fan when it comes to most things investment oriented. It is not a perfect company, but darn good and their intellectual honesty and process is top notch. So when Vanguard publishes a report titled “Vanguard’s economic and capital markets outlook” I read it.
This annual publication came out recently and here are [...]

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Are Americans ready to retire?

July 15, 2010

Met Life recently issued a retirement readiness report for Americans. The findings largely mirror the results from similar studies done by other groups, but the major findings are still worth noting.
The Met Life study measured retirement readiness in 5 areas:

Income and benefits
Work
Leisure
Relationships
Overall planning for retirement

Here are some of the reports conclusions:

About half of Americans are [...]

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Investment markets are efficient and irrational

July 8, 2010

A client emailed me the other day and mentioned how crazy the investment markets seem to be these days. I agreed with her in an email response and her comment got me to thinking about the nature of investment markets and why they seem to be crazy. Here is my conclusuion.
#1. Markets are efficient. Due [...]

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Chicago Fed reports lower economic activity

July 1, 2010

The Chicago Fed publishes a nifty monthly index that is a snapshot of national economic activity. It’s called the CFNAI and for May the index moved slightly lower compared to April. Industrial and manufacturing production moved higher, but employment, consumption and housing were lower.  The three-month trend is still positive and above its historical trend, [...]

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Roth IRA for your teenager

June 29, 2010

Since it’s summer and many teenagers are finding summer jobs, here is a plug for Mom and Dad (or grandparents) to put money aside for the working teenager into a Roth IRA for them. As long as the teenager is gainfully employed, she/he can contribute up to $4,000 into a Roth IRA. Of course, the [...]

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Value of portfolio diversification

June 25, 2010

The investment results of the Yale University Endowment Fund have been very good over the last 10 years, especially when you compare it to what else was happening in the investment world during these 10 years.
This private fund returned 11.81% on average each year between 2000 and 2010. For comparison, the Vanguard S&P 500 Index [...]

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Letter to my son on Father’s Day

June 20, 2010

Dear KJ
Today  is Father’s Day and I wanted to share my thoughts with you as a Father about your personal finances. I know right now a big financial decision for you is how to spend your meager allowance and how to make your birthday money go as far as possible. One day you’ll be making [...]

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