| Finally. . . A Crystal Ball
"Stocks' Drop Worst in 2012" was the Wall Street Journal headline last Wednesday. Obvious questions emerge: 'What happened and what's going to happen next?'
Following procedure, financial media hyperbolized explanation. Specifically: 'it's a correction accounting for Europe, wholesaler inventories, or the Fed's employment announcement.' Generically: 'this is a correction of overpriced stocks.'
Speculative re-enactments were followed by 'what happens next' predictions. Forward looking guesses ranged from resumption of the bull market to mega apocalypse long overdue.
This goes to show lots of people can narrow the field of what happened scenarios, but commentary over what will happen encompasses the entire spectrum. Regarding both: how helpful.
I don't call this a correction for two reasons. First, many stocks remain undervalued relative to historical price to earnings data. "People were starting to feel confident; the main support beams for stocks are corporate earnings." [1]
Moreover, "correction" infers the price was wrong. The price is what it is, therefore it is never wrong. Always wrong, however, are half the people betting where the next price is headed.
So if not a correction, what is it? After rapid escalation in stock prices there is almost always a sell off. It could just be traders predictably taking profit.
While researching more banal prognostication over which to race my sarcasm this week, I ran across a gem every investor can use to better predict the future of his/her portfolio:
The Financial Research Corporation (FRC) conducted a study called, "Predicting Mutual Fund Performance II: After the Bear." Five investment categories were studied: domestic and international equities, corporate and government bonds, and tax-free securities. This effort was to establish the possibility of predicting future performance.
Nearly everything was scrutinized: past performance, Morningstar® ratings, investor costs, turnover, manager tenure, net sales, asset size, and a variety of risk/return measures - alpha, beta, standard deviation and Sharpe ratio.
FRC found only one reliable predictor of future performance – cost. Wow. The most predictable way to increase performance is to decrease the cost of the mutual funds you own.
A penny save is not just one earned…but one compounded over time.
So, if you are expending your time considering "expert'" opinions of what will next happen in the market, be mindful; the most predictable determinant of your investments' performance will largely be driven by costs you incur.
Finally: an honest to goodness Crystal Ball.
If your friends or family might benefit by controlling investment costs in 401(k)s, IRAs or other accounts, let them know about Wiser.
I welcome your questions and comments. becker@wiserfinancial.com
Marc Becker, AIF
Managing Partner, Wiser Financial Coaching
Columnist, The Advisor Sherpa
[1] Stocks' Drop is 2012 Worst WSJ.com
To read past articles and view past videos, visit: www.marcbecker.tv
Golf Tip of the Week
Experiment with Clubbing Up
Improving effortlessly at golf is a contradiction in terms--with one exception: club selection. Try the following experiment the next time you play a round of golf with little or nothing at stake. On your tee shots on par 3s and your approach shots on par 4s and 5s, figure the club you need and then take one more. For instance, if the 7-iron seems the perfect stick, leave it in the bag and go with the 6-iron. When your mind says wedge, pull out the 9-iron, and so on. As long as you make your normal full swing, you'll almost certainly score better. Here's why: - You've gotten your ego out of the way, eliminating unrealistic estimates of how far you hit the ball.
- You don't have to make the "perfect" swing and hit the "career" shot that the shorter club often calls for.
- There is often more trouble in front of and to the sides of greens than there is behind them. The longer club will put you past the trouble, even with a mediocre shot.
If this procedure teaches you a lesson, namely that making realistic and strategic decisions leads to lower scores, then stick with it. Source: http://www.nicklaus.com/nicklaus_golftips/
Trivia Time
This week's question: Who said "The hardest thing in the world to understand is the income tax"?
Do you know? E-mail your answer wendy@wiserfinancial.com and if you are correct, receive a free "Way to Go!", "You Rock!", or other congratulatory phrase. Then brag to all your friends about how smart you are.
The answers will be in next week's newsletter!
Last week's question: Everyone is talking about this week's Mega Millions lottery jackpot of $540,000,000-- that's more money than some entire countries make in a year! Name any country in the world with an annual GDP of less than $540 million.
Answer: There are many-- including Palau, Sao Tome and Principe, Micronesia, Tonga, and Dominica.
No one got the correct answer this week. :(
Source: Wikipedia.org, CIA World Factbook
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