Running Fire Drills On Your Portfolio

Best PlanRemember back to when you were in school. Mixed within the classes, lunch, and recess were regularly scheduled safety drills. There were fire drills, tornado drills, and for the Cold War kids, nuclear bomb drills (duck and cover).

I faintly remember the fire drills in grade school. The teachers emphasized walking in a calm, quiet, and orderly fashion, single file out of the classroom, down the stairs, and out the door. Each class had its own predetermined path that finished somewhere outside at a reasonably safe distance from the school. Continue Reading…

The Benefit of International Diversification

Keynes QuoteWhat happens if you only invest in the U.S. stock market and it goes no where over a longer period of time, say a lost decade? Your stock allocation, built to grow your money, just failed. Something needs to pick up the slack. And there’s no guarantee your bond allocation will come through.

Enter international stocks.

At first sight, it may not seem like it matters when you compare the long term returns of U.S. stocks (S&P 500), international stocks (MSCI EAFE), and a 50/50 split since 1970. As the table below shows, having a portion of your stock allocation diversified internationally doesn’t improve your returns, but you don’t really lose much either. Continue Reading…

What Type Of Investor Are You?

Investor BehaviorThere has been a growing upheaval in investing as we throw out overused theories and reintroduce behavior, redefine risk, and question labels that have been used for decades.

None of this is new. It was simply ignored or written off for decades thanks to a faulty belief in efficient markets. Ben Graham offered up behavior’s role in investing back in 1949 with the story of Mr. Market. Since then, emotion was magically removed from the markets and common sense has brought it back.

Those dark ages weren’t all bad. It brought index funds and low-cost investing to the masses. There’s the tiny issue that masses bring more emotion to the markets, but hey, it’s not perfect.

Still, index funds are another label – index investor and passive investor – used at a time when investing should be simplified. Continue Reading…

How Avoiding Big Market Losses Impact Returns

Avoiding Big LossesWe love to make money, but we hate to lose money even more. The ultimate investing strategy is the one that never loses money. Except that strategy doesn’t exist. The next best option is to control your investment risk to avoid the biggest losses.

Lets imagine someone gifted enough to guess every losing year in the stock market. Of course, it’s more then just picking the losing years. They’d have put their money in cash for the losing years but be invested in the market for every other year too. They’d have to bat 1,000 and stick with it over time.

The chart below shows exactly what their performance would look like, minus the losses in blue. Continue Reading…

Why You Must Invest In Stocks

Why You Must Invest In StocksImagine having to save, dollar for dollar, what you need in retirement. Now add in inflation. Your dollars need to keep up with the rising prices of all that stuff you’ll want and need in retirement. You’d have to out save that anchor slowly dragging down your dollar’s purchasing power.

This is why you invest.

Your money must keep up with the rising cost of inflation. In truth, inflation is what you’re really trying to beat when you invest.

Saving money is the first step in everyone’s process. Step two is to protect your savings from, and grow it faster than, inflation because your savings goes further when you do. Continue Reading…