November 25, 2024

Strategies: If Stocks Look Irresistible, Don’t Forget to Diversify

“This is one of those moments,”said Louis S. Harvey, the president of Dalbar, a research firm in Boston. “It’s one of those times we warn about year after year.”

Mr. Harvey has been documenting inconsistencies in investor behavior for more than two decades, and he was one of the first people I called last week for some expert perspective on the exuberant stock market.

The Dow Jones industrial average set a new closing record on Tuesday — and climbed even higher the next day, and the next day, and again the next. The Dow has risen nearly 10 percent in this young year alone. In the four years since stocks hit bottom in March 2009, their prices, on average, have more than doubled.

Already, fund flow data suggest that people who were frightened away from stocks after the catastrophe of 2008 have begun buying again this year. And no wonder. The stock market has been a marvel to behold.

What would Mr. Harvey tell someone who wants to start buying now, after sitting on the sidelines for the last four years?

“I’d say, if you can reliably predict where the market’s going, then jump in feet first — just buy, buy, buy,” he said. “But if you don’t know what the future will be,” he added, caution is the wiser course. Before plunging into the market, he said, “make sure that you select a reasonably defensive asset allocation strategy first.”

If stocks are irresistible to you, set up a balanced and diversified portfolio containing many different stocks and bonds, he continued. “The most important thing, once you have a strategy,” he said, “is to find a way to actually stick with it.”

He has seen soaring stock markets before, and, for the typical mutual fund investor, they have often gone badly. When the market is already high, Dalbar has found, many people start to buy. When it’s already fallen, they sell.

The dismal truth is that over the long run, the average person is a woeful investor, regularly losing money to more skillful traders. Dalbar performs an annual survey of actual investor returns in mutual funds, and compares them to the return of the overall market. He shared the latest, still unpublished figures with me. They tell a sorry story.

Over the last 20 years through December, the average return of all investors in United States stock mutual funds was 4.25 percent, annualized. Over the same period, the benchmark Standard Poor’s 500-stock index returned an annualized 8.21 percent. That’s a huge gap — nearly four percentage points a year over two decades.

I ran the numbers. A $10,000 investment at 4.25 percent would be worth $22,989 in 20 years. An investment in the S. P. 500, at 8.21 percent, would be worth $48,456. The difference is a sobering $25,467.

Why is the gap so wide? One reason is that after fees and expenses, the average mutual fund manager doesn’t beat the overall stock market, as many studies have shown. But that explains only part of the problem. The rest of it, Mr. Harvey said, is that investors themselves “move their money in and out of the market at the wrong times.”

“They get excited or they panic,” he added. “And they hurt themselves.”

It’s not that stocks are a bad idea in themselves. Holding a diversified group of stocks — along with a broad collection of bonds — has paid off for most long-term investors, Mr. Harvey and a large majority of strategists say. Stocks have outperformed bonds over the long term, while bonds have provided steady income and more reliable day-to-day returns.

Combining stocks and bonds, maybe with other assets, can create a less volatile portfolio, letting an investor sleep more peacefully. The question for most people isn’t whether to own stocks. It’s how to allocate them intelligently, as well as when to buy.

I asked Ed Yardeni, an independent economist and market strategist who has been bullish on stocks for four years, whether it makes sense to start buying now. “Obviously, it would’ve been better to buy them in March 2009,” he said. “But buying now still makes sense if you believe we’re in a secular bull market” — a market that will keep rising for a long time.

Mr. Yardeni assigned what he called “a subjective probability” of about 60 percent to that optimistic outcome. He said factors like growing energy independence in the United States and a “technological revolution that has never stopped” could help propel the domestic economy forward, bolstering corporate earnings growth and providing fundamental support for stocks. For the short term, he said, the expansive monetary policy of the Federal Reserve and other central banks is acting as a tonic for the stock market, and fear of disaster in Europe has abated.

Article source: http://www.nytimes.com/2013/03/10/your-money/if-stocks-look-irresistible-dont-forget-to-diversify.html?partner=rss&emc=rss

Wealth Matters: Protect Yourself from Investment Fraud This Madoff Day

Four years ago this week, Marc S. Dreier, a high-flying lawyer, was arrested and later charged with defrauding his clients of $700 million. A few days later, Bernard L. Madoff’s fraud was uncovered. Totaling an estimated $65 billion, Mr. Madoff’s fraud was in a class by itself. And then, a short time afterward, some of the brokers who had been selling fraudulent certificates of deposit for R. Allen Stanford began to turn on him; he was arrested in February 2009 and later convicted of a $7 billion fraud.

These schemes collapsed with the economy in 2008. But on their anniversaries, it may be a good time to ask whether you have done all you can to lower your risk of being caught up in a similar fraud. Call it Madoff Day (celebrated on Dec. 11, the day of his arrest).

Protecting yourself against fraud, or simply bad advice, is easier said than done. The most common advice is to make sure your money is held by an independent custodian or firm whose job is to keep your money safe. That wasn’t the case with either the Madoff or Stanford fraud. But that is only one small step.

So what else can investors do to protect themselves, not only from unscrupulous advisers but also from rushing into an investment that is clearly too good to be true?

Marc H. Simon, a lawyer who lost two years of bonuses, his job and months of unreimbursed expenses when Mr. Dreier’s law firm collapsed, said he has thought a lot about what he could have done differently.

Mr. Simon said that six or seven years before the fraud was uncovered, he knew of inconsistencies in the firm’s 401(k) plans. But the big red flag should have been that Mr. Dreier had sole control over every major decision at the law firm. Still, that had been Mr. Dreier’s pitch: work for him and don’t worry about the irksome details partners typically face.

“People like Drier and Madoff were highly intelligent individuals, they were very charismatic and they were giving people what they wanted,” Mr. Simon said. “It is harder to bring into question those who are providing you something you want.”

Randall A. Pulman, a lawyer in San Antonio who represents many victims of Mr. Stanford’s fraud, agreed that the will to believe was what ensnared people.

“For you and me, it’s too good to be true,” he said. “For the guy who has been working in the oil fields, how is he supposed to know?”

Of course, fraud and just plain bad advice are not limited to the poor or unsophisticated. Robert P. Rittereiser, the former chief financial officer of Merrill Lynch and former chief executive of E. F. Hutton, is working as the receiver for two funds suing J. Ezra Merkin, a former money manager who steered money to Mr. Madoff. Mr. Rittereiser did not think investors in Mr. Merkin’s funds knew that their money was simply being passed on to Mr. Madoff. But even if they did, they may not have seen anything to be concerned about.

“They were investing money and getting appropriate returns for the kind of fund it was,” Mr. Rittereiser said. “Most of them had a relationship of some kind and confidence with Merkin and the people he was dealing with.”

So how do you protect yourself? The first step would seem to be picking an honest adviser. The good news is that only about 7 percent of advisers have disciplinary records, said Nicholas W. Stuller, president and chief executive of AdviceIQ, a company that evaluates advisers. The bad news is that those violations appear only after someone has filed a complaint.

Mr. Stuller’s company, which has now approved some 2,400 advisers, rejects anyone with any type of infraction — from a securities fine to a misdemeanor for getting into a fight. He said this policy might keep some good advisers off the site, but his goal is to search the records of federal and state regulators to find advisers he knows are clean.

“There are advisers who have significant negative disciplinary history with one regulator but appear to be pristine with another regulator,” Mr. Stuller said. “There was a guy in Minnesota who was stealing insurance premiums. In his enforcement record, it says, ‘We’re going to alert Finra,’ but his Finra record is clean,” he said, referring to the Financial Industry Regulatory Authority. “That’s where the regulators don’t talk to each other.”

AdviceIQ’s main competitor, BrightScope, takes a different approach. It notes disciplinary actions taken against advisers but leaves it up to the consumer to go to regulators to determine what the violations were.

“We want the consumer to go to the source data, because there is a lot of liability in publishing that,” said Mike Alfred, co-founder and chief executive of BrightScope. “Many of these folks are good advisers, and they’ll take care of you. But what if they had one crazy client who put all his money in Internet stocks in 2000 and then sued?”

Article source: http://www.nytimes.com/2012/12/08/your-money/protect-yourself-from-investment-fraud-this-madoff-day.html?partner=rss&emc=rss

Stress Tests for Europe’s Banks Take Longer Than Expected

LONDON — The stress testing of European banks is taking at least a month longer than initially expected because some banks submitted figures that were too optimistic or lacked detail, a person with direct knowledge of the process said on Thursday.

Banks were asked for more information about their calculations of how they would fare in distressed financial markets and to resubmit their results to the European Banking Authority, said the person, who spoke on condition of anonymity because the process is not public. The European Banking Authority, which is based in London, is expected to publish the results next month instead of this month.

“The tests are important because they give disclosure that is consistent across all banks,” said Philip Richards, an analyst at Société Générale in London. “It’s not about who fails but about getting more information including on sovereign debt risks.”

The delay, announced in a statement late Wednesday, comes after a similar test conducted last year drew criticism that the parameters used were not rigorous enough, and that the tests were too easy to restore confidence in the 91 European banks covered. Some economists said they excluded the possibility of a Greek debt default.

The banking authority released a stricter test methodology in March and the 91 banks submitted their data in April and May. But erroneous or missing data meant the banking authority would need more time to analyze the results.

“Errors will have to be rectified and amendments made where there are inconsistencies or unrealistic assumptions,” the authority said in the statement.

Some banks complained about the additional workload caused by the stress tests and others questioned their relevance. Hypo Real Estate, which failed the previous round of stress tests, said last year that the tests had “limited relevance” because it was already transferring troubled assets into a vehicle backed by the German government. Hypo Real Estate failed last year’s stress test along with ATEBank of Greece and five Spanish savings banks.

The new rules laid out by the authority this year have become a heated political issue again in Germany because they appear to create a problem for some German landesbanks by disqualifying a part of the funds they now use to meet regulations on shock-absorbing reserves. The economics minister of the state of Hessen, Dieter Posch, said in April that the state’s landesbank, Helaba, should boycott the stress test.

As part of the test, European banks would have to reveal how much sovereign debt from a European country they hold. At a time when some analysts say that a restructuring of Greece’s debt remains an option, such numbers will be closely watched by investors.

Jack Ewing contributed reporting from Frankfurt.

Article source: http://feeds.nytimes.com/click.phdo?i=aa522554f155f6c14849dc2c4c5bfd74