What is your Standard Deviation? This is one of the most important questions an investor needs answered. If you don’t know what your Standard Deviation is, contact your advisor and ask. If they can’t give you an answer within 30 seconds, it’s time to find a new advisor! The fact is, if they can’t tell you almost immediately, they never calculated your Standard Deviation before recommending a portfolio for you. That would be considered Financial Malpractice. Watch the 2 minute video, and let me know your thoughts…

The Market Is Rigged Against You

Every day millions of shares of stocks and mutual funds are traded on the national exchanges. The system is premised on an equal playing field. Buyers and sellers are supposed to have access to the same information in order to make decisions about whether to buy or sell.

Many have long suspected this premise is false. We know the “big boys” have access to super computers which provide trading information nanoseconds before it’s available to others, giving them the opportunity to use this data before it’s known to the average investor. It’s called “high frequency trading” but it’s really nothing more than legalized front running.

According to an article in the Wall Street Journal, this is child’s play compared to the inside trading that pervades the markets.

The article reports a three year investigation by federal authorities that could “ensnare consultants, investment bankers, hedge-fund and mutual-fund traders and analysts across the nation…”

Who is on the wrong side of these trades? The average Joe who is trying to save enough for retirement.

Even without this illegal activity, the securities industry practically insures most investors squander their money. The industry wants you to believe some “guru” (usually your friendly broker) has the skill to pick stocks or mutual funds that will beat market returns. A recent study by Standard and Poors demonstrates the confusion between luck and skill which is fostered by these “experts.”

The study found that, over the five years ending September 2009, only 4.27% of large-cap funds, 3.98% mid-cap funds, and 9.13% small-cap funds were able to repeat their top-half or top quartile rankings.

No large- or mid-cap funds, and only one small-cap fund maintained a top quartile ranking over the same period. Over longer periods, persistence of performance generally was less than you would expect from random chance.

Other studies support the view that stellar performance by actively managed mutual funds can be attributed to luck and not skill.

The ramifications of the insider trading scandals and these studies are profound and largely ignored by retail investors. If mutual fund managers had skill, you would expect a high correlation between past returns and future returns. This correlation does not exist. Since they don’t have skill, relying on them to produce outsized returns is gambling and not investing.

While that is depressing enough, add the fact that the entity on the other side of your trade may have inside information that gives them an unfair edge.

The conclusion is both inescapable but elusive for most investors: Your goal should be to capture market returns, using a globally diversified portfolio of low cost index funds, in an asset allocation appropriate for you. This means firing your market beating broker or advisor and selling all of your individual stocks, bonds and actively managed mutual funds.

You can be a victim or victor in your quest for financial security. You are looking for guidance in all the wrong places if you a relying on the securities industry to help you get there.

Dan Solin

Author of the bestseller, The Smartest Investment Book You’ll Ever Read

Active Managers Having Their Worst Year Ever- Since the data proves over and over again the active management can not beat indexing, for managers to be having their worst year ever is really saying something. If you’re digging a bad hole, stop digging! Remove active management and start getting the returns you should be without gambling & speculating your wealth away.

http://www.cnbc.com/id/40474974

Economic Stimulis- Here are some good ideas:

• Undo the record tax increases that go into effect January 1 by passing a simple bill that ensures no tax increase on any American, any business, anywhere.
• Undo Obamacare by defunding healthcare legislation that creates government run healthcare and will increase health costs $1 trillion by 2020.
• Undo the onerous rules, regulations and disincentives to job creation.
• Undo the  plan to restore the Death Tax.
• Undo czar system by defunding all the czar positions created by  administration. This action will send a message to the American people that there will be no more wasteful spending.

Then the 112th Congress should seize the opportunity to pass proven job-creating policies:

• Get spending under control immediately and go back to the 2008 budget level, which would save about a trillion dollars over ten years. This will send a clear signal that Congress is serious about righting our nation’s finances, and set the stage to move toward a balanced budget – just like we did in the 1990′s.
• Act swiftly to create incentives for investment and job creation. A good place to start is the Economic Freedom Act introduced by Congressmen Jim Jordan (R-OH) and Jason Chaffetz (R-ID), which will:
• Reduce the payroll tax by half for one year to provide immediate liquidity for companies and employees;
• Eliminate the capital gains tax to encourage investment in new companies;
• Reduce the corporate tax rate to 12.5%, to make us competitive globally;
• Permanently eliminate the death tax so small businesses and family farms can continue creating jobs for future generations;
• Provide immediate business expensing so American workers have the best equipment and are the most productive.
• Lay the foundations for long term economic growth by promoting an American energy plan that will lower our energy costs.
  • Develop offshore energy : The American Energy Alliance estimates that increasing domestic energy production offshore would add $2.7 trillion in economic activity over the next ten years, as well as create 1.7 million new jobs.
  • Promote clean natural gas : Encouraging development of the Marcellus Shale formation in West Virginia, Pennsylvania, and New York would make us dramatically less dependent on foreign energy and, according to a recent study from Penn State University, create over 200,000 new jobs in Pennsylvania alone. There are similar natural gas formations in Texas and Louisiana, meaning the potential for expanding affordable energy and creating new jobs is possible throughout the country.
  • Encourage oil shale development : There is an estimated 800 billion barrels of oil locked away in shale in Colorado, Utah, and Wyoming, which is three times as large as the proven reserves of Saudi Arabia. Current regulations, however, make it economically impossible for companies to develop this resource. Allowing American companies to develop this resource would create jobs, lower the cost of energy, and reduce our reliance on OPEC.
  • Create prizes for innovation : Congress should award prizes for innovation in clean energy technologies, from wind and solar to carbon capture technology for coal plants. Instead of taxing affordable energy, America should provide incentives for its entrepreneurs and scientists to develop the next generation of energy technology. This will expand American energy without increasing energy costs and killing jobs, as plans like cap and trade would do.
• Assert control over the EPA by passing a law that prevents the EPA from regulating carbon emissions so businesses do not have to deal with unknowable future costs imposed by regulatory fiat.

So much for timing the market. Investors who skipped out of September lost a bundle of money.

Investors Pulled $16 Billion From U.S. Stock Funds in September

October 13, 2010, 12:09 PM EDT

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By Sree Vidya Bhaktavatsalam

Oct. 13 (Bloomberg) — Investors removed $16 billion from U.S. stock funds last month even as the Standard & Poor’s 500 Index posted its best September since 1939, according to data from Morningstar Inc.

International stock funds attracted $1.5 billion in September, while bond funds collected $26 billion, Chicago-based Morningstar said today in a report. Investors withdrew money from U.S. stock funds despite an 8.8 percent increase in September, the biggest gain for the month in 71 years.

Investors have removed $84 billion from U.S. stock funds since the beginning of 2009, favoring the perceived safety of bonds over a 74 percent rebound in stocks from their March 9, 2009, low. Withdrawals accelerated after the stock-market plunge on May 6, with investors pulling $65 billion from mutual funds that buy U.S. equities since April, Morningstar’s data show. Investors have poured about $221 billion into bond funds and $22 billion into non-U.S. stock funds this year.

Money-market funds have had withdrawals of $873 billion since the beginning of 2009 as interest rates have stayed close to zero.

–Editors: Christian Baumgaertel, Larry Edelman.

Emancipation From What…Capitalism?

“In the year 1000, the average infant could expect to live about 24 years.  A third died in the first year of life.  Hunger and epidemic disease ravaged the survivors.  By 1820, life expectation had risen to 36 years in the west, with only marginal improvement elsewhere.  After 1820, world development became much more dynamic.  By 2003, income per head had risen nearly ten-fold, population six-fold.  Per capita income rose by 1.2 per cent a year: 24 times as fast as in 1000-1820.  Life expectation increased to 76 years in the west and 63 in the rest of the world.” Angus Maddison, Contours of the World Economy.

To paraphrase – for 1800 years, progress was virtually non-existent; then it accelerated sharply.  It takes a severe case of denial for someone to ignore these lessons of history.  What they show is that when freedom prevails, the ingenuity and inventiveness of people creates incredible wealth. This is the true source of improvement in the human condition.

The US Constitution was crucial in the process of freedom.  It established a new country with protected property rights.  The Declaration of Independence declared the “unalienable Rights” of “Life, Liberty and the Pursuit of Happiness.”  It also declared that “whenever any Form of Government becomes destructive of these ends, it is the Right of the People to alter or to abolish it, and to institute new Government….”

Yes, the US has its history with slavery and women’s suffrage, but the Civil War, and 13^th and 19^th Amendments to the Constitution fixed those wrongs.  It wasn’t easy, but the system worked.  No system of social and economic organization has done more to lift living standards than the US system of “free market capitalism.”  No system of governance has improved the lives of so many people.

So, why is this system under attack?  Have we uncovered problems with free market capitalism that are the equivalent of slavery and women’s suffrage?  President Obama thinks so.  In a speech last week, he called belief in capitalism “blind faith.”  He said this philosophy, of letting people “fend for themselves” has “failed.”  He added that “people are frustrated, they’re anxious, they’re scared about the future.  [But] now is not the time to quit….We’ve been through worse…. It took time to free the slaves.  It took time for women to get the vote.”

This is the Progressive’s mantra – “Capitalism is unjust, unfair…A new system must be put in its place and this takes time.”  There is only one problem with this logic.  It’s not really progress and it has never, ever worked.  Today’s progressives are the ones that ask for blind faith.  They want people to believe that they have finally figured out how to do it right

But this is just wishful thinking.  Every economic system, no matter how it is described, is a system that distributes resources among competing interests.  In a Progressive system, government officials control this process.  In a free market system, resources flow to those who use them best to improve the lives of others.  The market votes every day on these products and services and the successful ones are given more resources.  To prove how fluid this system is, more businesses fail each year than succeed.

This is not true of government.  Once started, government programs rarely fail.  The system perpetuates them with more money and more resources.  The waste increases over time until it becomes so overwhelming that the entire system fails.  The Roman Empire, the Soviet Union, Greece, California and Illinois are all the evidence needed.

The real problem with the economy these days it that we have moved too far away from free market capitalism.  As government spending has increased, so has unemployment.  This is not a mystery; the bigger the government, the smaller the private sector and the less dynamic the economy.  If there is any emancipation needed these days it’s from the government, not from capitalism.

 Brian S. Wesbury – Chief Economist

Robert Stein, CFA – Senior Economist

Brokers lie about Index Investing. Why? It generally boils down to 3 reasons: They lie because they don’t know, They lie because they know they don’t know, or They lie because their livelihood depends on the lie!

September. 23 2010 

5 Lies About Index Funds

By RICK FERRI

Image via Wikipedia 

 

 

Financial incentives encourage advisors to talk trash about indexing.

The truth about index investing must be told over and over again because lies are constantly being told around it. Many of those telling lies are financial advisors whose income depends on their client’s use of high-cost active management strategies.  They view simple, low-cost passive strategies through index funds as bad for their business.

I started out about 22 years ago as an investment professional monitoring and evaluating active managers. As a result of this experience, by the mid-1990s, I became an avid believer in what John Bogle, Charley Ellis, Burton Malkeil and many others had been saying for a long time. The fees in active funds are too high, the talent too scarce, and competition too intense for active managers to outperform indexing in the long-term. Ellis cleverly described the entire process as a loser’s game.

My upcoming book, The Power of Passive Investing, provides summaries of exhaustive academic studies covering the active versus passive debate going back many decades. Every study in the book ends with the same conclusion; while a handful of active managers beat their benchmarks due to skill, it wasn’t by much, and most didn’t sustain that benchmark-beating performance for long. In addition, it’s not possible to determine luck from skill or to pick skilled managers in advance. To make matters worse for investors, the success rate for a portfolio of funds drops precipitously as more active funds are added to the portfolio.

With the evidence overwhelmingly in favor of passive investing for the long-term, why won’t more advisors admit these facts and shift their focus to advising clients on the benefits of index investing rather than making believe they’re market gurus or trying to pick those who are? One reason – there’s a lot more money to be made by keeping the lie alive. The fees and commissions earned through active investing are considerably higher than what should be earned by telling the truth about passive investing and charging a fair fee for this advice. Even those advisors who have switched can’t bring it upon themselves to lower their own fee. See my recent article on High-Fee Passive Advisor Hypocrisy.

Brokers in particularly are deeply set against index fund investing because they believe it’s very bad for their revenue stream. Their efforts to sell costly actively-managed mutual funds have generated a lot of trash talk about low-cost index funds. The following is a list of 5 common lies spun by advisors who are dead-set against indexing.

1. Active US stock funds beat the market over the past decade.  Less than 50 percent of surviving US stock funds beat the S&P 500 since 2000, and this number would be much lower if closed and merged funds were included. But that’s not the problem with this argument. The primarily large cap S&P 500 is not a good benchmark for many actively managed US equity funds because they have a small cap or mid cap focus. Using appropriate size benchmarks brings the percentage of winning funds down considerably.
2. Index funds will always achieve below average returns. Index funds will achieve returns that are much closer to the market averages than the active funds your advisor is pushing, and that’s what matters. On average, mutual funds underperform by the fees they charge. Index funds have much lower fees than active funds. This makes low-cost index fund investing an above average portfolio strategy. 
3. Indexing doesn’t work in inefficient markets such as small cap or international. You can count on every active fund advocate to use poorly constructed or inappropriate indexes to make the argument that active returns are better than they are. For example, the Russell 2000 is a common benchmark for US small cap stocks, but it has known annual reconstruction flaws that reduce its annual return by up to 2 percent. The MSCI EAFE is a common international equity benchmark, but it doesn’t include popular emerging markets stocks or Canadian stocks. Proper benchmarking makes active management far less attractive.
4. Active managers perform better in bear markets. The evidence surrounding this often heard statement is inconclusive. The data does show that active funds tend to hold more cash in a bear market due to greater fund redemptions, and this can create the impression of lower risk, but there’s no evidence supporting the idea that active funds have lower volatility or that fund managers have market timing skill.
5. Warren Buffett has beaten the market and this proves indexing doesn’t work. Wrong. This only proves that Warren Buffett, chairman of Berkshire Hathaway (Ticker: BRK), has the Midas touch. It doesn’t prove that the advisor you’re using has Buffett-like talent. Your portfolio may beat the market due to luck, but let’s not be naive and call advisor luck as skill. Even Buffett repeatedly recommends that individual investors buy index funds that charge minimal fees. As an aside, I find it ironic that most advisors who use the Buffett argument typically don’t own BRK in their client’s portfolios.

Indexing works because active investing can’t work. The fees are too high, the opportunities too few, and the talent too scarce. Ignore the lies told by those people who earn a fat living selling the dream of market beating returns. You’ll earn more money over your lifetime by creating and maintaining a low-cost, low-tax, low-turnover portfolio of index funds.

Be GREEDY when others are FEARFUL! In volatile markets, those that remain disciplined are the one’s rewarded. Nobody knows where the market is going, and nobody knows which direction the next 20% move will be. But the market has gone up 100% of the time. As Hockey great Wayne Gretsky said “I skate the where the puck WILL be, not to where it was.” Stay disciplined, buy low-sell high, remain in the market, and ignore all the media pundants spewing negative news!

Download the FREE booklet for peace of mind investing-

www.wwmcoach.com

The Dow to hit 50,000 in 5 years!

Dow 50,000 In Five Years!

Do I have your attention? Good. Now ignore all that investment guru nonsense.

Truth be told, market predictions aren’t about the markets; they’re about marketing. By predicting markets, the gurus provide the illusion of skill and knowledge, and that brings attention to whatever service they’re selling. This is especially true if a guru makes an outrageous market prediction that actually comes true. People tend to remember the one big call and overlook a guru’s dismal long-term track record.

http://www.forbes.com/2010/07/15/dow-5000-stock-market-gurus-personal-finance-indexer-ferri.html

Luck is the Key to Succes for Most Top Mutual Funds-

Expert View
Luck Is The Key To Success For Most Top Mutual Funds
Ahmed Taha, 06.23.10, 2:59 PM ET

Mutual fund advertisements are far too effective. Fund companies often promote actively managed funds that have generated high returns, and investors flock to such funds. Unfortunately for these investors, there is little relationship between high past returns and high future returns.

Why doesn’t strong past performance continue? The primary reason is that luck is a major factor in fund returns, and luck generally does not persist. Investors tend to overlook the role of luck in fund returns. There are thousands of actively managed equity funds, so even if all fund managers were randomly picking their portfolios by throwing darts at a stock page, a large number of funds would still soundly beat market averages.

In a new study finance professors Eugene Fama of the University of Chicago Booth School of Business and Kenneth French at Dartmouth’s Tuck School of Business quantify the role of luck in fund returns. They find that the strong returns of actively managed funds are almost always due to luck, not the stock-picking skill of fund managers. The study will be published in the Journal of Finance.

Fama and French examine the returns from 1984-2006 of actively managed funds that invest primarily in U.S. common stocks. They compare funds’ actual returns to the returns of comparable standard passive benchmarks, such as Fama and French’s so-called three-factor and Carhart’s four-factor asset pricing models.

Fama and French first examined the returns of funds before management fees but after commissions and other trading costs. They found that these returns for actively managed funds, as a whole, are about the same as those of their passive benchmarks. In other words, overall, active fund managers have little stock-picking skill.

In Pictures: 10 Ways Investors Sabotage Themselves

Think about that for a minute: Investors pay well over $10 billion annually in fees to managers of actively managed funds who, as a group, have only enough skill to cover their trading costs. Because funds have other costs, such as management fees, which are included in fund expense ratios, active funds’ returns actually trail their passive benchmarks by approximately the level of the funds’ expense ratios (around one percentage point per year).

The fact that active managers as a whole have little stock-picking skill doesn’t mean that every manager has little skill. In fact, there might be many great managers whose stock-picking skills are being offset by poor stock pickers.

To estimate the frequency of skilled managers, Fama and French conducted 10,000 simulations of the effect of luck on fund returns. They used past fund returns to simulate the distribution of the returns of funds in a world in which all managers have just enough skill to cover all their costs, including management fees.

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Because of luck, individual funds’ simulated returns often differed greatly from the expected returns of the funds’ benchmarks. Many funds had good luck (and thus exceeded their benchmarks), and many funds had bad luck (and thus fell short of their benchmarks). The results of these simulations indicate how much variation across fund returns is likely to occur due to luck alone.

They next compared the distribution of actual fund returns between 1984 and 2006 with the results of the 10,000 simulations. If many fund managers have more than enough stock-picking skill to cover all their costs, then there should have been many more strong performers than occurred in the luck-based simulations. This is because such skilled managers should have been more likely to generate high returns than did managers in the simulations, all of whom had only just enough skill to cover their costs.

The results are disheartening. Very few fund managers had sufficient stock-picking skill to cover their costs. For example, using a standard measure of expected returns as the benchmark (the three-factor asset pricing model), only the actual best-performing 2% of funds, as a group, outperformed the simulations. In other words, as a group, the top 2% of funds had higher returns than the top 2% of the simulated fund returns. Funds did even worse when the expected returns of the four-factor asset pricing model were used as the benchmark.

These findings indicate that only a very small percentage of fund managers have more than enough skill to cover their costs. The vast majority of strong-performing managers are lucky rather than sufficiently skilled.

Furthermore, even in this small number of managers who, as a group, have more than enough skill to cover their costs, the amount of skill was unimpressive. Fama and French found that these managers are unlikely to noticeably outperform a large, efficiently managed index fund in the future.

The case against active management is even stronger when one realizes that Fama and French’s analysis doesn’t take into account all the costs of investing in actively managed funds. Because active managers generally trade more often than index fund managers, investors who own actively managed funds outside of tax-advantaged accounts (such as 401(k)s and Individual Retirement Accounts) typically must pay higher capital gains taxes than do investors in index funds.

Fama and French’s study illustrates the folly of chasing funds with high past returns. Investors do not realize that they are generally chasing luck, not skill. Thus, it should be no surprise that successful actively managed funds generally don’t continue their strong performances. So, the next time you see an advertisement touting a fund’s market-beating returns, remember that the fund’s manager was probably just lucky.

Ahmed Taha is a professor of law at Wake Forest University School of Law. He can be reached at tahaa@wfu.edu.