SMI helps “prepare God’s people for works of service, so that the body of Christ may be built up until we all reach unity in the faith and in the knowledge of the Son of God and become mature...” (Ephesians 4:12-13).
We focus on teaching Christians how to set and implement financial priorities that are honoring toward God. Therefore, our teaching begins with the principle that the things most worth knowing are rooted in God’s Word:
“All Scripture is God-breathed and is useful for teaching, rebuking, correcting and training in righteousness” (2 Timothy 3:16). It’s worth knowing that we should look primarily to God’s wisdom, not the conventional wisdom, for principles to guide our decision-making. The principles God has given us are practical and personally relevant.
“Now it is required that those who have been given a trust must prove faithful” (1 Corinthians 4:2). It’s worth knowing that we must each accept personal responsibility for making knowledgeable, biblically-consistent financial decisions. We cannot look to others to make the tough choices for us.
“The rich rule over the poor, and the borrower is a servant to the lender” (Proverbs 22:7). It’s worth knowing that debt is enslaving and that we should avoid it as much as possible.
“In the house of the wise are stores of choice food and oil, but a foolish man devours all he has” (Proverbs 21:20). It’s worth knowing that maintaining a proper balance
between current spending and long-term saving is a sign of wisdom.
“The plans of the diligent lead to profit as surely as haste leads to poverty” (Proverbs 21:5). It’s worth knowing that we should consistently invest from a carefully considered strategy rather than impulsively on a case by case basis.
“Divide your portion to seven, or even to eight, for you do not know what misfortune may occur on the earth” (Ecclesiastes 11:2). It’s worth knowing that we should rely on diversification—rather than a preoccupation with market cycles—as a means of controlling risk and protecting our capital.
“Do not wear yourself out to get rich; have the wisdom to show restraint” (Proverbs 23:4). It’s worth knowing that we must be on guard against greed and spending our energies in a futile attempt to get the highest possible returns.
As Christians, it’s a constant challenge to stay faithful to the financial principles found in God’s word and not allow ourselves to be swayed by worldly wisdom.
God has given us protective principles to help make day-to-day financial decisions. By following these principles consistently, you and I can have confidence that, whatever the short-term sacrifices may be, we are making wise spending, saving, and investing choices. That frees us to leave the results with God, knowing that “Godliness with contentment is great gain” (1 Timothy 6:6).
The field of behavioral economics studies why people make the financial decisions they do. We visit the topic occasionally, as in August's cover article, Why Smart People Make Big Money Mistakes—and How to Correct Them ( Members Only). This area of research has discovered a number of fascinating things about the way humans are wired, and how that wiring often works to our detriment in the financial arena.
Daniel Kahneman is one of the founders of this field. Last weekend, The New York Times Magazine ran an article titled Don’t Blink! The Hazards of Confidence, which is an excerpt from Kahneman's latest book. It's an interesting read if you're into this sort of thing.
I thought I'd pull a couple paragraphs where Kahneman tells about one of the most famous of all the behavioral economics experiments. It clearly highlights his theme that investors are typically overconfident and that overconfidence hurts their long-term returns,
Odean analyzed the trading records of 10,000 brokerage accounts of individual investors over a seven-year period, allowing him to identify all instances in which an investor sold one stock and soon afterward bought another stock. By these actions the investor revealed that he (most of the investors were men) had a definite idea about the future of two stocks: he expected the stock that he bought to do better than the one he sold.
To determine whether those appraisals were well founded, Odean compared the returns of the two stocks over the following year. The results were unequivocally bad. On average, the shares investors sold did better than those they bought, by a very substantial margin: 3.3 percentage points per year, in addition to the significant costs of executing the trades. Some individuals did much better, others did much worse, but the large majority of individual investors would have done better by taking a nap rather than by acting on their ideas. In a paper titled “Trading Is Hazardous to Your Wealth,” Odean and his colleague Brad Barber showed that, on average, the most active traders had the poorest results, while those who traded the least earned the highest returns. In another paper, “Boys Will Be Boys,” they reported that men act on their useless ideas significantly more often than women do, and that as a result women achieve better investment results than men.
This is why we emphasize having a long-term plan and sticking with it. This helps protect you from your own overconfidence. It's also why all of SMI's investing strategies are mechanically based; i.e., they don't rely on us to make lots of judgment calls or predictions. This helps protect you from our overconfidence!
None of this guarantees that you'll be optimally positioned when the market shoots up nearly 20% in 17 trading days, as it did this month. But it does stack the odds in your favor that over time, you're hopefully going to make more right calls than wrong ones. Hopefully, and again over time, that will lead to better results (and much more peace of mind along the journey). That's certainly how it has played out for those who have been investing according to SMI's strategies over the past decade or more.
In Upgrading, each month we rank more than 1,500 mutual funds by type and determine which ones have been delivering the best recent performance. We recommend the purchase of the top funds in each of five SMI risk categories. These funds will be held until they stop outperforming. At that point, we recommend replacement funds that are showing stronger recent performance.
Upgrading works because, market leadership rotates among different investment approaches and companies of different sizes as economic conditions change. But even though market conditions are constantly changing, fund managers rarely do. Managers who excel under one set of market conditions often are only average (or worse) under a different set of conditions. So, rather than buy a fund and hold it through both the periods that favor the manager's approach and the periods that don't, Upgrading continually guides us to funds that are in favor right now.
This means we move in and out of funds more frequently than some people are used to, but it has helped us establish a track record of beating the market over an extended period of time, under both bullish and bearish market conditions.
HOW HAS UPGRADING PERFORMED?
Fund Upgrading has achieved a consistent advantage over the market (as measured by the Wilshire 5000, the broadest measure of U.S. stocks)
The chart below shows the cumulative effect of this advantage, comparing the 11-year growth of a $25,000 Upgrading portfolio (dark shaded area) vs. the market return (light shaded area).
The $25,000 invested in Upgrading at the beginning of 1999 grew to $71,250 while the market portfolio (as measured by the Wilshire 5000) increased to only $35,250. In other words, the Upgrading portfolio was worth almost twice as much after 12 years than a portfolio that earned the market's return.
THE UPGRADING PROCESS
1. Sound Mind Investing's new subscriber materials will help you determine the appropriate amount to invest in each stock or bond group, which we call risk categories. These materials will guide you to the most appropriate column for you in our asset allocation chart (below).*
2. The asset allocation chart shows you exactly what percentage of your portfolio we suggest be invested in each category of mutual fund.
3. SMI's monthly Recommended Funds page shows which funds are currently recommended. Choose one (or more) funds from among the four recommendations in each category.
4. Each month, you simply review the new Recommended Funds page to see if any of the funds you own have been replaced. If any have, the new funds are clearly noted, and you just sell the old fund and buy the new recommendation.
Bob Farrell was a legendary analyst for Merrill Lynch from 1967-1992. As this MarketWatch article summarized, "Over several decades at brokerage giant Merrill Lynch & Co., Farrell had a front-row seat to the go-go markets of the late 1960s, mid-1980s and late 1990s, the brutal bear market of 1973-74, and October 1987's crash. Out of those and other experiences came Farrell's 10 "Market Rules to Remember."
Here they are:
Markets tend to return to the mean over time
Excesses in one direction will lead to an opposite excess in the other direction
There are no new eras — excesses are never permanent
Exponential rapidly rising or falling markets usually go further than you think, but they do not correct by going sideways
The public buys the most at the top and the least at the bottom
Fear and greed are stronger than long-term resolve
Markets are strongest when the are broad and weakest when the narrow to a handful of blue chip names
Bear markets have three stages — i) sharp down, ii) reflexive rebound, iii) a drawn-out fundamental downtrend
When all the experts agree, something else is going to happen
It's so easy to get caught up in the headlines of the day and their potential impact on our investments. Today it's the debate over how to go about addressing the debt ceiling. But there's always something: interest rates rising (or falling), the stock market rising (or falling), tax rates rising (or falling), and on and on.
If we stop and think about it, most of us probably recognize that the one variable we have no control over is our rate of return. Yet that's where we focus much of our effort. Instead, we're usually better off focusing on those areas where we are directly in control.
Times that seem particularly uncertain tend to paralyze many investors. They can't figure out what to make of the information bombarding them, so they shrink into a defensive posture where they're afraid to do anything.
If that's been you, SmartMoney author Glenn Ruffenach has a list of areas for you to focus on as you work on your retirement plan. The good news is these are all under your direct control. (Read the full article for more on each one.)
Setting a budget. It's among the most important steps in planning for later life, but less than half of workers have put pencil to paper, according to the Employee Benefit Research Institute. Why are budgets so critical? Projecting expenses and income can help you pin down your "number," the amount of money you need to save for retirement.
Timing Social Security. If you're married, the timing of exactly when each spouse first files for benefits can translate into thousands of dollars gained — or lost — in retirement.
Reducing debt. Between 2000 and 2008, the average debt for households headed by a person age 55-plus almost doubled to $66,000, according to Strategic Business Insights, a research firm in Menlo Park, Calif. Again, here's where would-be retirees can take the reins.
Creating a pension. If nothing else, the recent financial meltdown underscores the need for investments that throw off income, regardless of what's happening in the markets.
Managing taxes. No, you can't control tax rates, but you can practice "tax diversification," says Randall, of Financial Enlightenment. ... "You don't know what your effective tax rate will be in retirement," Randall says. "That's why you should diversify."
Planning for long-term care. Yes, this is a tough one. But it's also an area where failing to act could prove devastating. Among your options: self-insuring, if you can set aside sufficient funds. Long-term-care insurance, which is complicated and expensive, is another possibility, as are so-called hybrid policies that provide some long-term-care benefits and some life insurance (but perhaps not enough of either).
Too strapped for time to dig into these areas? Ruffenach isn't buying it:
I know: The invariable response is, "But I don't have time." Please. It never fails to amaze me how people will spend weeks planning a visit to Disneyland with the grandchildren but won't take a few hours to assemble a retirement budget that could easily last 30 years. Believe me: You can find time. Take control of what you can control — and take the anxiety out of your retirement planning.
Here is an audio version of SMI founder Austin Pryor's editorial from the June issue of Sound Mind Investing — recorded on location at the beach (well, at least the sound effects were!).
Austin explains the many investing lessons he's learned from his annual beach trip. Everything from devising a travel plan to being prepared for rainy days has an investing application. (And don't forget about not comparing yourself to those muscle-bound guys on the beach.)
To listen, click the arrow on the player below (3:25).
Here's another short audio commentary from SMI founder and publisher Austin Pryor. Today, Austin explains how to become an effective long-term investor.
To listen, click the arrow on the player below (2:35).
Do you have a workable, long-term strategy in place — one tailored to your personal circumstances — that will protect your family and help secure their financial future? If not, get our free report, Seven Key Principles for Christian Investing.
Using Scripture as a guide, we explain how creating specific boundaries and fostering certain attitudes will help you implement a focused, long-term plan. These include:
objective criteria for your investment decision-making;
That's a question that we ask and answer (to the degree possible) in the current issue of the Sound Mind Investing newsletter.
Of course, no one can know for sure what's ahead — as I discussed in a conversation yesterday with host Bob Crittenden on The Meeting House from Alabama's Faith Radio.
You can listen to a portion of that conversation by clicking the arrow on the audio player below (9 min.).
SMI publisher Austin Pryor's editorial in the current Sound Mind Investing newsletter notes that our human "ignorance of the future is staggering." Even the smartest of the "experts" can't know for sure what is going to happen.
James K. Glassman, co-author a dozen years ago of the bestseller Dow 36,000, conceded as much (subscribers' link) in a column last week in the Wall Street Journal.
In 1999, I co-authored a book called Dow 36,000 that became, in some circles, a notorious symbol for bullishness about the stock market. While the book had a provocative title, its fundamental message was mainstream: Long-term investors should load up on U.S. stocks....
Today, the Dow Jones Industrial Average is just 20% higher than it was when Dow 36,000 was published in September 1999 and the markets stood at 10,318....
What happened? The world changed....
The first major change is that the relative economic standing of the U.S. is declining. The Congressional Budget Office estimates that U.S. growth will average a little more than 2% over the next 70 years, compared to about 3.5% during the second half of the 20th century. This is a stunning decline....
The second big change involves risk. Along with most investment analysts, I used to consider only one kind of risk: the volatility of an asset's price. While stocks have returned a yearly average of about 10%, their actual returns bounce around from year to year. [See SMI executive editor Mark Biller's recent post on this.]....
But there is a second kind of risk, the kind that we can't really measure or expect — the murder of 3,000 Americans by terrorists in a single day, the Dow losing 1,000 points within minutes in a "flash crash," or home values in the U.S. suddenly plummeting. These discontinuous risks — or "uncertainties," as the famous University of Chicago economist Frank Knight called them — are multiplying in a world in which technology provides instantaneous connections among markets and allows just about anyone to do just about anything, anywhere....
In theory, historical averages show that stocks are a good buy if you can hang on through the miserable periods. But most investors find that excruciatingly difficult to do — a fact that I never fully appreciated in my 30 years of writing about investing.
Fear, or simply a need for cash, triumphs, and people sell before stocks bounce back. I've gotten tired of telling investors to buckle up and hang on. Instead, I am urging them to adopt a more cautious strategy than the conventional financial wisdom — or Dow 36,000 — would dictate.
Glassman is making a concession to human nature. In other words, he is acknowledging that the long-term investment approach that may make the most sense mathematically doesn't always work in the crucible of daily life and human decision-making.
Austin touched on this same topic in his November editorial, and he laid out an alternate strategy for investors feeling particularly nerve-wracked by the events of the past three years:
For those investors, it's better to have a less than optimum stock/bond allocation that they can stay with long term than an allocation suggested by our "seasons of life" approach that they can't tolerate and stick with during down markets.
Here's another short audio commentary by Sound Mind Investing founder and publisher Austin Pryor. Today, Austin explains one of the keys to long-term investing success: ignoring the news of the day.
To listen, click the arrow on the player below (1:15).
(If the audio player won't work for you, click here.)
Today, we have something a bit different for our Personal Finance Friday post: a personal invitation.
SMI was contacted recently by a long time subscriber in Ohio who is interested in starting an investing discussion group or club with other Sound Mind Investing readers and friends.
While this is not an officially SMI-sponsored event, it may be quite helpful for those looking to delve further into SMI strategies and principles. (And if you're nowhere near Ohio, this may give you an idea for starting something similar in your part of the world.)
On Thursday evening, March 3 in Centerville, Ohio (just south of downtown Dayton) this group will meet for the first time to discuss what a group like this may look like.
Directions: I-675 to Exit 7; go north; take the right on Feedwire Rd. — just past Tire Discounters is Saxby's Coffee (in front of The Home Depot).
The group is considering meeting once a month to use the Sound Mind Investing resources (monthly newsletter, weblog, SMI Handbook, etc.) as tools for discussion around the issues of responsible and godly investingprinciples.
The bottom line is they want this to be focused on Christ. If this is something that interests you, I'm sure they'd love for you to join them.
REMINDER: This group is not officially affiliated with Sound Mind Investing in any way. The group will be administered solely by the organizer of the event. SMI is not sponsoring the event, and cannot be held responsible for the content or the outcome of the meetings.
RSVP: Carey Northington of One Master Ministries is organizing the event. Please e-mail him at carey@onemaster.org no later than Monday, Feb. 28. Or call Carey at 937-477-6861.
"So how should one manage money in an era of unpredictability and volatility?" asks a story on the front page of today's "Money" section in USA Today.
The Dow Jones industrials' 261-point plunge Friday sparked by a sharp drop in consumer sentiment in July highlights that gloominess persists....
In recent weeks, a spate of economic reports have come in weaker than expected, fueling double-dip fears. In July, readings on manufacturing, retail sales, factory orders, employment, auto and home sales came in light. Last Wednesday, minutes of the Federal Reserve's June meeting indicated it expects growth to slow in the second half, prompting the central bank to lower its 2010 growth outlook to as low as 3%.
In the words of former Fed chief Alan Greenspan, the economy has hit an "invisible wall."
Whew! How should investors respond?
On a recent Faith Meeting House program on Alabama's Faith Radio, SMI assistant editor Joseph Slife (right) talked with host Bob Crittenden about the maintaining a long-term perspective when the short-term is unsettling.
Use the audio player below to listen (16 min.) — or download an mp3 (Windows users: right click, then "save link as").
When a certain mutual fund does especially well for you during a particular market season, it's easy to fall in love and hold on to that fund forever (or at least much longer than you otherwise would, absent the initial success). That can be a big mistake.
One of the primary virtues of SMI's Fund Upgrading strategy is it helps keep us from getting enamored with the "winners of the last war."
I was reminded of this yesterday while reviewing our monthly "white pages." These are the data sheets we create each month that serve as the basis for our fund recommendations for SMI Upgraders.
In my review, two funds that performed exceptionally well during the past two "market seasons," respectively, caught my eye. One (a large-company value fund) was a leader during the 2007-2009 bear market; the other (a large-company growth fund) was an outperformer in the years before that. The reason they caught my eye is that each one is currently ranked dead last in its particular category.
Are these bad funds? Absolutely not. On the contrary, these are great funds. I say that because I believe these are two out of a relatively small handful of funds that an investor actually could buy and hold through multiple market cycles and do pretty well over time.
Despite that, we find them terribly out of synch with the market during this stretch, to the point where it is probably quite difficult for many investors in these funds to stay the course and continue to hold them. If you can't hold on through the worst periods for a particular fund or strategy, that's a recipe for trouble, because you're likely going to bail at the worst possible time — right before that strategy/fund starts to make up for that under-performance with a stretch of great returns.
To be sure, Upgrading occasionally gets out of synch with the market, typically at market turning points. But it's unusual for Upgrading to stay out of synch for an extended period of time. That would require the market switching back and forth between bullish and bearish conditions multiple times in a relatively short span of time. Possible, but rare.
Most of the time, Upgrading moves with the market's trend, grabbing an extra percentage point of performance here and an extra point there, in good markets and bad. While we occasionally wish Upgrading would have done better over some recent stretch, we rarely ever have to wonder if Upgrading has completely lost its way or stopped working as a result of it performing poorly relative to the broader market.
Another advantage of Upgrading is that we are able to own great funds (such as the two referenced above) when those funds are in their sweet spot. That's largely what helps Upgrading outpace the market over time. When these funds go into their slumps, Upgrading forces us to sell these old favorites (often kicking and screaming) and moves us to new recommendations that are performing more in synch with the market (and hopefully leading it) during that new market season.
This consistent buying/selling discipline is why Upgrading has beaten the market in 10 out of the past 11 years.
We invite you to learn more about Upgrading and SMI's other time-tested strategies. For details on how to become an SMI print subscriber and/or web member, click the sign-up button below.
The most common definition of a stock market "correction" is when the market declines by at least 10%. Situations like last week illustrate why common definitions can get a little tricky in practice.
Using the closing prices of the market indexes, we still have not had an official correction since the bull market began in March 2009. By that measure, the market fell just 8.4% in the recent weeks through last Thursday, May 6.
But if you use intra-day prices, from the high on April 23 to the low on Thursday, the market fell 12.6% — enough to qualify as an official correction. Given the unprecedented nature of last week's drop and the fear that accompanied it, I expect most investors will think of this as an official correction.
In recapping this "correction or not" situation, MarketWatch editor Nick Godt points out some interesting parallels between the news/market action of the past week and that of September 2008–March 2009:
If it felt in recent weeks like we were thrown back in time somewhere between the collapse of Lehman Brothers in 2008, the credit market freeze and the deep global recession that followed, it wasn't just a bad dream.
Exactly what I was thinking (I should have written it faster!). Last week's rapidly building fear about "contagion" spreading from the Greek debt crisis, the partial seizing up of the debt markets and quickly following plunge in the stock market — all of it felt very similar to the period in September–October 2008.
Thankfully, it was relatively short-lived, in part because of Monday morning's announcement that Europe had agreed on their own version of "Le TARP" — a stimulus and debt-relief package equivalent to nearly $1 trillion. How in the world they are ever going to pay for that is beyond me, but it can't help but remind us of the U.S. government's response in March 2009 when we passed our own stimulus bill and the markets roared back to life.
Make no mistake, this is merely "kicking the can down the road," much like our own stimulus package. The hope is that an organic recovery can take hold that will allow these monstrous debt commitments to be repaid over time. Whether events will play out that way remains to be seen.
While the long-term implications of this approach is unknown, it's worth noting what the U.S. financial stimulus did to the investment markets. They took off and didn't look back for a year.
That's not to say it was the right thing to do — there are more important considerations than the short-term boosting of the financial markets, and I think most of us have serious reservations about the price to be paid for all this in the future. But for the present, as investors, it would probably be foolish to ignore the potential implications of this second gush of liquidity into the system. If there's anything we've learned from the past 10-15 years, it's how responsive financial assets have tended to be to monetary stimulus and liquidity.
Some are pessimistic about the immediate impact Europe's problems are going to have on the U.S. markets. But it seems to me that this is yet another round of ammunition for a "great next 12-18 months, then watch out" scenario. Time will tell.
As always, attend to your immediate priorities (debt, savings) and don't take more risk than necessary in pursuit of your investing goals. That's one bit of certain financial instruction we can offer in these "interesting times."
Whew! What a wild wide today on Wall Street — apparently driven by concerns that a debt-driven contagion could take hold in Europe and spread around the world. The Dow Jones Industrial Average was down almost 1,000 points (9.2%) before recovering to a 348-point loss (3.2%).
Here's a gut-wrenching summary from the Wall Street Journal:
Stocks plummeted in a flashback to the panicked trading of 2008 as investors registered deep fears about the European debt crisis. Selling accelerated late in the day due to a wave of automated sell orders that turned an ugly drop into full-blown market washout.... The velocity of the plunge in stocks was breath-taking.
Fears of contagion from Greece's debt crisis grew during the day and stocks were lower for most of the session. But many were at a loss to explain why stocks suddenly made such a staggering move.
A near 1,000-point drop is "people jumping out of windows" territory, said Gerard Cassidy, an analyst with RBC Capital Markets.
As losses piled up, the Dow went into freefall, tumbling through 10000, before dropping as much as 998 points, or 9.2%. The biggest closing point drop in the Dow's history occured on Sept. 29, 2008, at the height of the financial crisis, when the Dow ended the day down 777.68 points, or 6.98 percent.
One observer suggested to the WSJ that photos and video of street protests in Greece played a significant role in today's market turmoil.
"To tell you the truth, people are seeing what's going on in Athens on CNBC and it's not helping the market at all," [said Joe Benanti, managing director at Rosenblatt Securities]. "You're just watching things sort of melt away."
As much as anything, this could simply be an overreaction on the part of extremely jumpy investors, following a year of huge market gains without any significant corrections. The Greece situation and potential it seems to have to spread and roil the debt markets just looks too familiar to what happened 18 months ago. Sometimes when the market has run up too far, too fast, just about anything will do as an excuse for a fall (though they aren't usually as dramatic as today).
There's another key ingredient here: fear. The old saying is that the stock market "climbs a wall of worry." Worry is out there all the time, as investor fret about this and that. But some days that worry, given the right spark, explodes into full-blown fear. The WSJ's MarketBeat blog reports the market's "fear index" (also known as the VIX) is "currently hovering around 40, a level we haven’t seen since April last year."
It's difficult to know precisely what to make of this. Most fears are unfounded — as noted in our our February 2008 cover story, The High Cost of Fear (subscriber link). Or at least things we're fearful of don't turn out nearly as bad as first assumed.
But, on the other hand, sometimes fear can help protect us from genuine threats. And, make no mistake, genuine threats are out there, as we have noted many times here on the blog and in our monthly newsletter.
The best approach is to review your long-term plan, reflect as calmly as possible on current events, and keep away from emotional decision making.
As noted in our January 2009 cover story, How to Avoid Panic and Reduce Fear (subscriber link), "[i]nvestors are biologically induced into short-term thinking by the stress hormones released during episodes of acute fear. Fear has the effect of inducing concrete short-term thinking with poor flexibility in judgment."
Remember our SMI bedrock verse: "For God has not given us the spirit of fear, but of...a sound mind" (2 Timothy 1:7).
In the midst of high unemployment and growing concern about federal spending, the stock market (despite yesterday's sharp loss) has been moving along very nicely, thank you.
Why? SMI's executive editor Mark Biller (right) discusses that question — and explains why it's so important to have a long-term investing plan — on today's MoneyLife radio program. Mark talks with host Chuck Bentley of Crown Financial Ministries.
Click the arrow below to listen (20 min.) — or use this link to download an mp3 (right click/save as).
A huge audience tuned in to a sporting event that took place in my hometown over the weekend: the Kentucky Derby. In addition to the tens of millions who watched on television, almost 156,000 crowded into Churchill Downs on a rainy day to experience the tradition, wagering, and cheering firsthand.
Before the race, a "vote" was taken as to which horse would win. Participants voted with their pocketbooks by placing their bets, and the horse on which the most money was wagered became the favorite. Rarely do the fans in any sport spend more time studying data, reading commentary, or listening to experts before reaching a decision.
The eventual favorite reflected the collective wisdom of the racing world. Given this, you'd expect the favorites in this race to have a record of success. Surprisingly, you'd be wrong — very wrong.
Over the past 30 years (including this past Saturday when pre-race favorite "Lookin At Lucky" came in sixth), the favorite has made it into the winner's circle only twice. That's a failure rate of 94%!
Based on their extensive knowledge of the horses' recent histories, people "in the know" make educated judgments about how the horses will perform on a given day. But actually, they're just guessing. No one knows for sure.
In a sense, the financial markets aren't much different. When an investing professional offers stock, bond, and mutual fund recommendations, he doesn't know where the markets are going any more than you do.
He knows where they've been, of course; that is, he knows how they've behaved in the past under similar economic circumstances. Based on that knowledge, he forms opinions as to how the markets will behave in the near future. But reality isn't that simple.
There are two difficulties in making accurate forecasts. The first is that one or more of the governing assumptions will turn out to be wrong. The forecasters don't know which ones, so they can't fix them. The other is that the underlying assumptions are incomplete. But the forecasters don't know which factors have been left out, so they can't include them.
Despite this, publishers of the leading financial magazines and web sites regularly offer bold headlines such as "Where to put your money now" or "Eight stocks to buy today."
This incorrectly conveys a sense of predictability concerning the economy and markets, and downplays the reality of risk. (Frankly, financial magazines have a mediocre track record when it comes to their specific investment recommendations.)
Sound Mind Investing typically doesn't make forecasts as to what the future holds for the markets. We're willing to admit we're clueless about that. It's our belief, however, that it is impossible to self-destruct financially if your decision-making is pointed in the direction of God's glory.
One characteristic of investing that glorifies God is that it respects His wisdom, not man's. If it's your desire to have confidence in managing your finances rather than relying on the guesswork of others, ask God to help you learn the essential basics you need to become a faithful and effective steward. In tandem with your praying, begin your education by reading our recent Financial Literacy 101 series.
And here's something to keep in mind: Asking for the Lord's help is not a gamble. It's a sure thing. "If any of you lacks wisdom, he should ask God, who gives generously to all without finding fault, and it will be given to him" (James 1:5).
Below are several quotes about money management from late U.S. presidents. Some quotes relate to personal financial management, others to the management of the government's finances. Some touch on both areas.
George Washington: "As a very important source of strength and security, cherish public credit. One method of preserving it is, to use it as sparingly as possible… but remembering also that timely disbursements to prepare for danger frequently prevent much greater disbursements to repel it" (Farewell Address, 1796).
Thomas Jefferson: "Never buy what you do not want because it is cheap" (from "A Decalogue of Canons for Observation in Practical Life," 1825).
Abraham Lincoln: "That some should be rich, shows that others may become rich, and hence is just encouragement to industry and enterprise. Let not him who is houseless pull down the house of another; but let him labor diligently and build one for himself" (from an address to the New York Workingmen's Democratic Republican Association, 1864).
Now, a few more from other sources:
Grover Cleveland: "I feel obliged to withhold my approval of the plan to indulge in benevolent and charitable sentiment through the appropriation of public funds.... I find no warrant for such an appropriation in the Constitution" (from an 1887 veto message, when vetoing an appropriation to help drought-stricken counties in Texas).
Calvin Coolidge: "I favor the policy of economy, not because I wish to save money, but because I wish to save people. The men and women of this country who toil are the ones who bear the cost of the Government. Every dollar that we carelessly waste means that their life will be so much the more meager. Every dollar that we prudently save means that their life will be so much the more abundant. Economy is idealism in its most practical form" (Inaugural Address, 1925).
Franklin D. Roosevelt: "Any government, like any family, can for a year spend a little more than it earns. But you and I know that a continuation of that habit means the poorhouse" (from address made as a presidential candidate in 1932).
And here's a personal favorite, specifically about government, but apply it to your household finances as well — and take warning:
Ronald Reagan: "Government always finds a need for whatever money it gets."
The New York Times' "Wealth Matters" column — targeted to wealthier readers — has served up a profile of Princeton economics professor, Burton G. Malkiel, author of the long-time bestseller, A Random Walk Down Wall Street, and now (with Charles Ellis), The Elements of Investing (Wiley, 2009).
Dr. Malkiel is a strong proponent of investing via no-frills, low-cost index funds. He argues that even the wealthy are more apt to come out ahead by using simple indexes, rather than hiring advisers to help them try to find outperforming stocks, hedge funds, and/or alternative investments.
For the wealthy, index funds have an image problem. They are considered the economy cars of the investing world: they'll get you there but not in style and you're always worried they may break down. Anyone at a serious level of wealth, the thinking goes, needs the equivalent of a luxury sedan, with strategic stock choices, hedge funds, private equity, real estate.
Burton G. Malkiel says this is all hogwash....
[He argues that the wealthy] would have fine returns without the volatility and high fees if they simply used indexes to diversify their money across asset classes. "This is still a strategy that is good for people of all income levels," he said.
Malkiel says many wealthy people waste money by paying for advice that doesn't improve their investment performance beyond what they would experience with index funds.
While the old adage says you get what you pay for, Mr. Malkiel argues the opposite. "The one thing I'm absolutely sure about is the less I pay to the purveyor of the service, the more that will be left for me," he said....
This makes sense for the modest investor with a straightforward portfolio. But the counterargument is that the wealthy need more advice because of the complexity of their assets, and that the advice is worth the fees. (Mr. Malkiel would say the rich just need more tax-planning advice.)...
"You don't need a commodities fund if you're really well diversified and into emerging markets," he said. "You’re going to have some investments in Brazil, which is natural resource rich. It's simple."
We agree with Dr. Malkiel that many investors — including many wealthy investors — overcomplicate matters, thereby increasing expenses without any significant increase in performance. That's why we developed our simple Just-the-Basics strategy.
Here is an interesting tidbit from former Treasury Secretary Hank Paulson's new book, On the Brink: Inside the Race to Stop the Collapse of the Global Financial System.
Back in my temporary office on the 13th floor, a jolt of fear suddenly overcame me as I thought of what lay ahead of us. Lehman was as good as dead, and AIG's problems were spiraling out of control. With the U.S. sinking deeper into recession, the failure of a large financial institution would reverberate throughout the country — and far beyond our shores. It would take years for us to dig ourselves out from under such a disaster.
All weekend I'd been wearing my crisis armor, but now I felt my guard slipping. I knew I had to call my wife, but I didn't want to do it from the landline in my office because other people were there. So I walked around the corner to a spot near some windows. Wendy had just returned from church. I told her about Lehman's unavoidable bankruptcy and the looming problems with AIG.
"What if the system collapses?" I asked her. "Everybody is looking to me, and I don't have the answer. I am really scared."
I asked her to pray for me, and for the country, and to help me cope with this sudden onslaught of fear. She immediately quoted from the Second Book of Timothy, verse 1:7—"For God hath not given us the spirit of fear, but of power, and of love, and of a sound mind."
The Wall Street Journal has a longer version of this excerpt, courtesy of the Hachette Book Group, Inc.
The no-fee ETFs from Fidelity include some of the most popular ETFs on the market, including the iShares S&P 500 Index, iShares Russell 2000 Index, iShares MSCI Emerging Markets Index, and the iShares Barclays Aggregate Bond fund.
A Reuters report characterized Fidelity's move into commission-free ETFs as a belated recognition that exchange-traded funds have gained a significant presence in the mutual-fund marketplace.
[Fidelity's] new alliance with BlackRock of New York marks a final acknowledgment of the growth of ETFs and their importance to retail investors, said Paul Justice, an analyst who follows the industry for Morningstar in Chicago.
Although the industry has more than doubled since 2005, to $1 trillion globally by BlackRock's count, ETFs will continue picking up market share, Justice said. Following Fidelity and BlackRock's move "you will see a great deal of competitive response," he added.
The rapid growth of ETFs offered by iShares, State Street Corp and others is in stark contrast with the skepticism investors have shown traditional stock mutual funds, which saw high outflows as stock markets sank.
Fidelity introduced a single ETF of its own in 2003, but never followed up with additional products....
Tom Lydon, editor of the ETF Trends newsletter, said he expects ETFs to continue to grow as investors realize their fee benefits. ETFs also have room to gobble more assets in 401(k) retirement-savings plans, where they have been little used to date, Lydon said.
Fidelity also announced it is replacing its current tiered-pricing model for stock trades with a flat $7.95 fee for online trades — $1 less than the stock-trading fee recently implemented by Schwab.
Neither Schwab nor Fidelity has announced any changes in their pricing structure for traditional mutual funds.
It's no secret that interest rates for money market funds are scraping bottom. Even the top recommendation in our current money rates table (subscription required) is paying a scant 0.30%. Vanguard Prime, one of the best-known and most popular MMFs available, is yielding a barely noticeable 0.05%.
So is it time to abandon the money-fund ship and move your savings elsewhere?
Russel Kinnel, editor of Morningstar's FundInvestor newsletter (and director of the company's mutual fund research), is advising MMF investors to hang on rather than bailing on MMFs and moving to short-term or ultrashort bond funds.
We're still wary of ultrashort funds [following the implosion of several such funds in 2007 and 2008]. Short-term bond funds can work if some losses in the short run are acceptable — for example, if you are parking money between investments, plan to hold for a year or two, or just want a conservative bond holding in your long-term asset-allocation scheme....
But for other uses, such as emergencies or upcoming big-ticket expenditures, I'd stay with money market funds. Think about what will happen when interest rates start to rise. Bond funds will initially lose money because their superlow-yielding bonds will be discounted in the face of new higher-paying bonds. On the other hand, money market funds will quickly start to have higher yields, yet they won't lose money when rates go back up.
Kinnel concedes that MMFs aren't exciting, "but money market funds are there to serve in an emergency. Insurance always costs you money, and that's how I'd look at money markets."
Another practical matter is simply: Is it worth the trouble to switch? A Los Angeles Times story (titled, "Look, Ma, Nearly No Yield") quotes Peter Crane, head of money-fund research firm Crane Data: "My general rule is, if you're not going to make $100 more [in interest] by switching, don't bother."
Although 2009 was the toughest year on record for money funds, the MMFs recommended by SMI outperformed the overall field (for the 12th year in a row). Details are available for SMI web members in our February Level 2 article.
In an article on passive vs. active approaches to mutual-fund investing, the Wall Street Journal quotes Vanguard founder (and passive indexing guru) John Bogle on what is perhaps the biggest challenge facing active investors: "Yesterday's winners," said Bogle, "are far more likely to be tomorrow's losers."
In other words, many actively managed funds are loaded up with stocks that did well in the past (that's why managers bought them) but that are in the process of becoming underperformers. Active managers are constantly playing a game of "move ahead, then fall behind" — which generates expenses, but not much to show in terms of actual profits in comparison with low-cost indexing.
Two observations: 1) Bogle is right — this is the general case with active management; 2) Nonetheless, many actively managed funds have runs of outperformance that can stretch for many months (even years in rare cases).
Identifying these outperforming funds and investing in them until their success begins to falter is the essence of our Upgrading strategy. Upgrading isn't perfect, but that's okay. There is no perfect strategy. What Upgrading has been able to do is generate annual returns that have strongly outperformed indexing in recent years (although not every year; as noted in our just-released February issue, indexing eclipsed Upgrading ever-so-slightly in 2009).
We're all for indexing for those investors who want to follow that approach — and we're thankful that Mr. Bogle's Vanguard firm offers a terrific mix of index funds that we use for our Just-the-Basics indexing strategy. But we're also glad that Upgrading offers a way to meet the "yesterday's winners, tomorrow's losers" challenge and (usually) come out ahead.
Citing stats from the Investment Company Institute, USA Todayreports that investors withdrew a net $490 billion from money market funds during the first 10 months of 2009. Most of went — where?
If you guessed "into stock funds," you're wrong. Nearly two-thirds of the money went into bond funds.
Normally, investors chase after stocks during periods of red-hot returns, and this year has produced rip-snorting returns for many stock funds. The average stock fund has soared 27.4% this year, according to Lipper, which tracks the funds. And 36 funds have soared 100% or more in 2009.... But investors aren't chasing hot returns.
Instead, they're "chasing" the perceived safety of bonds. Plus a significant number of investors apparently are cashing out and using the money for "non-investing" purposes.
"More money is flowing out of money funds than is going into bond funds — something that's only happened twice in 26 years," says Vincent Deluard, strategist at TrimTabs.com, which tracks fund flows. "It shows how deep the recession is: They may be taking money out to pay the bills or the mortgage."
Unfortunately, the story doesn't break down — for the dollars going into bonds — just how that money is being spread among funds of different average durations. Given current low rates, short- and intermediate-term funds would seem to be the safest bond funds to be holding now. People buying into funds with long durations may be setting themselves up for a major disappointment.
Bond prices typically rally when interest rates fall and tumble when interest rates rise. The yield on the bellwether 10-year Treasury note is just 3.54%. "If rates rise, that would be bad," Deluard says.
Indeed, as we warned in the January issue of SMI, the "potential for rising inflation to hurt bond values by pushing interest rates higher is one of the more important big-picture ideas for investors to be mindful of going into the next decade."
The Wall Street Journal has also taken note of the heavy inflow into bond funds, speculating that the shift from stocks to bonds is influenced by the fact that "[b]aby boomers...are bulking up on bond funds as they approach retirement."
In November, only three of the 20 best-selling funds were diversified U.S.-stock funds (one index mutual fund, two index ETFs).
Blog
Members Only). This area of research has discovered a number of fascinating things about the way humans are wired, and how that wiring often works to our detriment in the financial arena.
Here is an audio version of SMI founder Austin Pryor's 
That's a question that we 
Here's another short audio commentary by Sound Mind Investing founder and publisher 
SMI was contacted recently by a long time subscriber in Ohio who is interested in starting an investing discussion group or club with other Sound Mind Investing readers and friends.
The bottom line is they want this to be focused on Christ. If this is something that interests you, I'm sure they'd love for you to join them.
Whew! How should investors respond?
I was reminded of this yesterday while reviewing our monthly "white pages." These are the data sheets we create each month that serve as the basis for our fund recommendations for SMI Upgraders. 
Why? SMI's executive editor Mark Biller (right) discusses that question — and explains why it's so important to have a long-term investing plan — on today's MoneyLife radio program. Mark talks with host Chuck Bentley of 
The eventual favorite reflected the collective wisdom of the racing world. Given this, you'd expect the favorites in this race to have a record of success. Surprisingly, you'd be wrong — very wrong.
Back in my temporary office on the 13th floor, a jolt of fear suddenly overcame me as I thought of what lay ahead of us. Lehman was as good as dead, and AIG's problems were spiraling out of control. With the U.S. sinking deeper into recession, the failure of a large financial institution would reverberate throughout the country — and far beyond our shores. It would take years for us to dig ourselves out from under such a disaster.
