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…

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…

Why You Should Own Stocks And Bonds

Stock Market LossNo other asset class lives up to the long term returns of stocks. Despite that fact, most investors don’t stick it out long enough during the periods when stocks perform poorly and the big losing years tend to drive investors insane.

Of course, accepting that losses are inevitable helps to deal with the year to year results many investors obsess over. There are ways to invest, using different assets, that help make those stock losses more bearable. By combining two assets like stocks and bonds, you get a smoother ride over time because stocks and bonds don’t always move together.

Your allocation doesn’t need to be complex either. One of the most often cited allocations is a 60/40 Portfolio. It’s made up of 60% stocks and 40% bonds. How you choose to build each portion is up for debate. Continue Reading…

The Art of Losing Money

If we avoid the losersAny chump can bet all their money on a single stock and get wiped out. But it takes a special kind of genius to invest and consistently lose money in the market. They follow one mistake with another, compounding their losses with opportunity cost. To avoid the same fate, we can steal a few lessons in how to lose money from the great investors who came before us.

Warren Buffett repeats his two simple rules often:

Rule No. 1: Never lose money. Rule No. 2: Never forget rule No. 1.

Easy enough. I use the same rules in Vegas and I swear it never fails.

But you know better. Right?

Never losing is impossible. Anyone who tells you different is lying. The great investors know losing is part of investing. They lose money better than anyone. Continue Reading…