Cliff Asness on investment success

Investment success is about sticking to the plan.

Source: Cliff Asness on investment success – Business Insider

Long-term, being a successful investor comes down to taking a disciplined approach with the right amount of risk that will allow you to ride out the inevitable tough markets. It’s time in the market that matters, not timing the market.  

Most investors are not prescient enough to see every sell off or bear market, but by using an asset allocation approach that invests in assets that do well in times of growth (stocks), inflation (commodities), contractions (bonds), and the growth of other regions (emerging markets), the investor will be taking advantage of whatever is working in the current cycle and be set up to take advantage of the next part of the cycle.

Markets and economies experience cyclical moves from the flow of capital.  As one industry or country grows it attracts investment.  As it continues to grow, more and more capacity is added until eventually there is an overcapacity and the cycle begins to contract. (ex. the fracking industry currently)

An asset allocation strategy takes advantage of these cycles by exposing a portion of the investor’s portfolio to the asset class that is benefiting and being prepared to take advantage of the next leg in the cycle.

So make a plan and stick to it.  If you need help formulating an appropriate asset allocation, seek help from an advisor who can gauge your risk tolerance and help you stick to the plan in times of turbulent markets.


Only 1 in 10 Participants Contribute the Maximum to a 401(k)

According to the BlackRock Global Investor Pulse Survey, only 11% of 401(k) participants contribute the maximum allowed under the IRS limits.

The biggest fear clients facing retirement have is “am I going to run out of money?”  By the time clients get close to retirement it’s too late to do much about, other than delaying retirement, which never seems to be popular advice.

Today’s life expectancy in the US is approaching 80 years for both sexes (CDC website) so why do we think we can support 25 year retirements with only 30 year careers?   The answer is we can’t.  In order to support a 25 year retirement we need to put away a good portion of our income every year and take advantage of the power of compounding.

Tax advantaged savings plans, like the 401(k), offer the best vehicle for most people to save and invest for retirement.

  1. The deductions are automatic – You never even have a chance to spend the money because it’s deducted from your paycheck and deposited to your 401(k) account.
  2. Most plans have an employer match – FREE MONEY! (well not really, you are working for it ) The employer match is a guaranteed return on your investment.
  3. Tax deferred growth – Compounding and tax deferral is the an unbeatable combination, this means all your money is benefitting from the exponential power of compounding.

We all need to take charge of our own outcome in retirement.  In order to have the type of retirement we envision we will need to save and invest on our own behalf to make it a reality.  One of the best vehicles to do that is the 401(k), so automatically contribute as much as you can while your working and let the power of compounding work for you, to provide the type of retirement you want.

Be careful of pundits talking their book.

The Man Who Hates E.T.F.s – The New York Times

AllianceBernstein, or AB as the firm has recently rebranded itself, represents the opposite of this trend: It is an old-school money manager that offers, for a fee, a range of stock and bond funds that promise to beat benchmark stock or bond indexes. The problem is that since 2010 many of the so-called active funds offered by AB and its peers have trailed their benchmarks, not least offerings that invest in large American companies in the Standard & Poor’s 500-stock index.

Source: The Man Who Hates E.T.F.s – The New York Times

Commodities Are Sounding an Alarm – Is it a buy signal?

In my post earlier I published a chart showing the asset class returns for the past 15 years. If you look closely, you’ll see that commodities have been the worst performing asset class for three years running.  Three down years with a high probability of 2015 being the fourth. Investor sentiment is so negative it may be close to a turning point.

On the face of it, the Bloomberg Commodity Index has had meaner bear markets than this one; just look at the cliff-drop in late 2008 below.

Source: Commodities Are Sounding an Alarm – Bloomberg View

10 Most Forgotten Retirement Expenses | BlackRock

Understanding your retirement expenses is an equally important step in successful retirement planning.  Take the time to carefully consider some of the most overlooked retirement expenses:

  1. Health Care
  2. Income tax on traditional 401(k) and IRA withdrawals
  3. Income tax on Social Security benefits
  4. Housing
  5. Adding a vacation spot
  6. Helping elderly parents
  7. Helping adult children
  8. Helping grandchildren
  9. Insurance Premiums
  10. Inflation
    Source: 10 Most Forgotten Retirement Expenses | BlackRock

Weekend Reads for Investors: The “What about the Economy?” Edition

At the 2015 CFA Institute Fixed Income Management Conference in Boston, I learned that almost every speaker is concerned about the liquidity of corporate bonds. Many pointed the finger at Dodd-Frank and Basel III, which require greater amounts of high-quality capital. This means that investment banks, long-time facilitators of corporate bond-market making, are doing very little of it as they are reluctant to hold the inventory. This flies in the face of evidence that the bid-ask spread is narrowing. Speakers pointed out that much of the liquidity is being provided by hedge funds running algorithms designed to make money based on mispricing. But what happens when the conditions in which algos normally trade are violated? Most of the speakers think there would be no liquidity. Ouch!

Source: Weekend Reads for Investors: The “What about the Economy?” Edition