The Art of Letting Go

This is a great article by Jim Parker of DFA.  We need to learn to understand what we can control and what we can’t.  It’s a bit like the Serenity Prayer:
     God grant me the serenity
to accept the things I cannot change;
courage to change the things I can;
and wisdom to know the difference.

This is excellent advice!




In many areas of life, intense activity and constant monitoring of results represent the path to success. In investment, that approach gets turned on its head.


The Chinese philosophy of Taoism has a word for it: “wuwei.” It literally means “non-doing.” In other words, the busier we are with our long-term investments and the more we tinker, the less likely we are to get good results.


That doesn’t mean, by the way, that we should do nothing whatsoever. But it does mean that the culture of “busyness” and chasing returns promoted by much of the financial services industry and media can work against our interests.


Investment is one area where constant activity and a sense of control are not well correlated. Look at the person who is forever monitoring his portfolio, who fitfully watches business TV, or who sits up at night looking for stock tips on social media.


In Taoism, by contrast, the student is taught to let go of factors over which he has no control and instead go with the flow. When you plant a tree, you choose a sunny spot with good soil and water. Apart from regular pruning, you leave the tree to grow.


But it’s not just Chinese philosophy that cautions us against busyness. Financial science and experience show that our investment efforts are best directed toward areas where we can make a difference and away from things we can’t control.


So we can’t control movements in the market. We can’t control news. We have no say over the headlines that threaten to distract us.


But each of us can control how much risk we take. We can diversify those risks across different assets, companies, sectors, and countries. We do have a say in the fees we pay. We can influence transaction costs. And we can exercise discipline when our emotional impulses threaten to blow us off-course.


These principles are so hard for people to absorb because the perception of investment promoted through financial media is geared around the short-term, the recent past, the ephemeral, the narrowly focused and the quick fix.


We are told that if we put in more effort on the external factors, that if we pay closer attention to the day-to-day noise, we will get better results.


What’s more, we are programmed to focus on idiosyncratic risks—like glamor stocks—instead of systematic risks, such as the degree to which our portfolios are tilted toward the broad dimensions of risk and return.


Ultimately, we are pushed toward fads that the financial marketing industry decides are sellable, which require us to constantly tinker with our portfolios.


You see, much of the media and financial services industry wants us to be busy about the wrong things. The emphasis is often on the excitement induced by constant activity and chasing past returns, rather than on the desired end result.


The consequence of all this busyness, lack of diversification, poor timing decisions, and narrow focus is that most individual investors earn poor long-term returns. In fact, they tend to not even earn the returns available to them from a simple index.


This is borne out each year in the analysis of investor behavior by research group Dalbar. In 20 years, up to 2012, for instance, Dalbar found the average US mutual fund investor underperformed the S&P 500 by nearly 4 percentage points a year.1


This documented difference between simple index returns and what investors receive is often due to individual behavior—in being insufficiently diversified, in chasing returns, in making bad timing decisions, and in trying to “beat” the market.


Recently, one of Australia’s most frequently quoted brokers broke ranks from the industry and gave the game away on this “busy” investing. In his final note to clients before retiring to consultancy work, Morgan Stanley strategist Gerard Minack said he had found over the years that investors were often their worst enemies.2


“The biggest problem appears to be that—despite all the disclaimers—retail flows assume that past performance is a good guide to future outcomes,” Minack said.


“Consequently, money tends to flow to investments that have done well, rather than investments that will do well. The net result is that the actual returns to investors fall well short not just of benchmark returns, but the returns generated by professional investors. And that keeps people like me employed.”


It’s a frank admission and one that reinforces the ancient Chinese wisdom: “By letting it go, it all gets done. The world is won by those who let it go. But when you try and try, the world is beyond the winning.”

Middle Class Income Hard to Define

The middle class. Marketers target it. Politicians champion it. Economists talk about it. Most of us consider ourselves part of it.

Yet, when I’ve asked for a clear definition, I have not found anybody yet that really can tell me what “middle class” is.

I recently posted on Twitter that $90,000 was a middle-class household income and that it would take a nest egg of $3 million to generate that income in retirement.A couple of my colleagues responded that my figures were way too high and accused me of being out of touch. As a lifelong South Dakotan, I’m used to being seen as “out of touch,” but the idea that $90,000 was beyond a middle-class income intrigued me.

via Rick Kahler: Middle Class Income Hard to Define | Financial Awakenings.

Central Banks Rally Equity Markets | ETF Trends

Central bankers are planning on continuing to boost equity exposure via exchange traded funds. The Bank of Japan, among many others, plans to double exposure to stock ETFs over the course of the year, as falling bond yields disappoint.

Central bankers around the world have been putting direct investments into equity markets. This accounts for about $11 trillion in foreign exchange reserves, reports ETF Guide. A survey taken last month of 60 central bankers revealed that about 23% of them expect to raise their level of stock exposure, according to the Royal Bank of Scotland Group. [Global Equity ETF Technical Outlook]

For example, The Bank of Japan, second-largest holder of reserves, plans on doubling investment into the iShares MSCI Japan ETF NYSEArca: EWJ to 3.5 trillion yen, equal to $35.2 billion, by 2014. In addition to the exchange traded fund purchase, the BOJ will also buy Japan real estate investment trusts J-REITs so that their amounts outstanding will increase at an annual pace of about 1 trillion yen and about 30 billion yen respectively. [Japan ETF Rally Still Alive as Yen Weakens]

via Central Banks Rally Equity Markets | ETF Trends.

Why Individuals Should NOT Pick Stocks – Perspective from a former “Wall Street” Analyst

This is a great article by fellow ACA advisor Anthony Kure.  It supports by position that individual stock picking is not a game you will win!

Steve ——————————————

For the individual investor, doing extensive research, making a trade and having it pay off can be intoxicating- and dangerous in my opinion.

Why? Because based on my seven years of experience as a “Wall Street” stock analyst, I believe an individual’s winning trade on a stock could foster a false sense of confidence that will ultimately cost the investor in the long run.

In my current role as an independent and fee-only financial advisor, I believe individuals and families should not attempt to pick stocks but instead are best served by diversifying their investment assets using low cost, tax efficient funds or ETFs- usually index funds or ETFs. I will dig deeper into this topic in a later post but for now, I want to only provide a general sense of who you are up against when you make a trade on an individual stock.In the simplest terms, when you make a “trade” you are essentially making a bet with someone who has spent a lot of time and money to be better informed than you. Remember, in a case like buying an individual stock, someone else is selling that stock and you are basically in disagreement with that party on the value of the stock. Whether you realize it or not, most of the time that “someone else” is an institutional trader that is leveraging both extensive and expensive research and/or complicated mathematical algorithms to set their price to sell.

read the complete article here: Why Individuals Should NOT Pick Stocks – Perspective from a former “Wall Street” Analyst | Kure Net Worth Management.

Financial Self-Worth versus Financial Codependency (!)

This is an interesting article by Dave Jetson about some psychological aspects of money.  Let me know what you think.

Steve ================================

The professions of financial services and psychotherapy each have many of their own specific terms. With a growing understanding that these two professions have an overlapping area in feelings and emotions, new terms are starting to emerge. One of these is financial self-worth.

While financial net worth and financial self-worth are sometimes used synonymously, they actually are very different. Financial net worth is made up of our monetary assets minus our liabilities. Financial self-worth is the ability to feel positive about who we are and to be comfortable with our financial situation and the amount of money we have.

Another related term, with still a different meaning, is financial self-esteem. As an example, you may feel great for a while about making a sale that has helped your financial situation, yet still have an inner desire to get more money. The successful sale gave only a temporary boost to your financial self-esteem.

read the complete article here: Financial Self-Worth versus Financial Codependency | Jetson Counseling Blog.

Do-it-yourself investing? Read this first

There’s a battle brewing for your retirement savings, and it’s shaping up to be a doozy. Billions of dollars each year roll out of company-run 401(k) plans and into personal IRAs, increasingly directed by retirees themselves.

Who wants a piece of that money? Well, your old 401(k) plan would like to keep it, of course.

That’s what led to a recent federal study, put out by the Government Accountability Office, warning the public that the plans often attempt to steer workers directly into IRAs they run, thus maintaining their hold on fees charged.

The problem isn’t so much that their own IRAs are bad, but that workers don’t realize that they have choices, the GAO explained: Keep it in the 401(k), put it into a new employer’s plan, roll over into an IRA run by the same firm or a competitor, or (by far the worst choice) cash out.

via Do-it-yourself investing? Read this first – MarketWatch.

8 common mistakes retirees make

Paul Merriman has done a good job capturing the common mistakes retirees make.  I see a lot of them in my practice.

Steve =================================

When I talk to retirees about their money, I am often startled by the mistakes they make, and by how happy they seem to keep making them.

How many mistakes in the following list might apply to you — or maybe to your parents?

One: Most retirees don’t monitor and control their spending by having even a simple budget. For any business, that’s a recipe for trouble and pain. I think the danger is similar for any household.

Without a budget, you are much more likely to overspend than to underspend. That’s not good.

Two: Most retirees who do operate on budgets conveniently neglect to plan for predictable expenses such as income taxes and replacement of or repairs to items such as vehicles and homes. These things are a part of normal life, and there is little excuse for them to be treated as emergencies.

read the complete article here:  8 common mistakes retirees make – MarketWatch.

IG Report Says IRS Has No Idea What Its Own Rules Mean | Mother Jones

38The Inspector General’s report on the targeting of tea party groups by the IRS is now out, and I was hoping there might be some interesting tidbits now that we can see the whole thing. Not really, though. Mainly, it paints a drearily predictable picture of bureaucratic FUBARism, with various groups in various places either misunderstanding each other; not responding to each other; or assuming that stuff was getting done that, in fact, wasn’t getting done. Anyone who reads Dilbert regularly gets the picture.

But the soporific paragraph below actually tells us something pretty important. In fact, it’s the heart of the whole issue:

  • In April 2012, the Senior Technical Advisor to the Acting Commissioner, Tax Exempt and Government Entities Division, along with a team of EO function Headquarters office employees, reviewed many of the potential political cases and determined that there appeared to be some confusion by Determinations Unit specialists and applicants on what activities are allowed by I.R.C. § 501c4 organizations. We believe this could be due to the lack of specific guidance on how to determine the “primary activity” of an I.R.C. § 501c4 organization. Treasury Regulations state that I.R.C. § 501c4 organizations should have social welfare as their “primary activity”; however, the regulations do not define how to measure whether social welfare is an organization’s “primary activity.”

via IG Report Says IRS Has No Idea What Its Own Rules Mean | Mother Jones.

Rick Kahler: Affordable Care Act Costs, Consequences | Financial Awakenings

“I’m not sure what’s wrong or what kind of surgery you need, but we have to operate right now.”

If you heard this from your doctor, you’d jump off the examination table and run for the door. Yet that’s essentially the approach the President and Congress used three years ago to pass a bill, optimistically called the Affordable Care Act, that was the largest transformation of the U.S. health care system in our lifetime.

During the frenzied debate our elected leaders made many promises as to the amazing benefits this legislation would bestow on Americans. After listening to speeches from President Obama, Speaker of the House Nancy Pelosi, and President of the Senate Harry Reid, I recounted those promises in this blog on March 21, 2010.

Rick Kahler: Affordable Care Act Costs, Consequences | Financial Awakenings.

Why Aren’t Smartphones Making Us More Productive?

This is interesting.  Steve ====================

Imagine you woke up each morning, strapped a keyboard, monitor, Wi-Fi receiver, desktop computer, camera and stereo to your body, and ventured clumsily out the door.

About 100 million smartphones have been unleashed on America’s streets. So why isn’t this computing power making us more productive? Dennis Berman joins the News Hub. Photo: Getty Images.

Of course, you’re already doing it. You’re using a smartphone, and today that thin slab has roughly the same computing power as the powerful desktops of 2005.

We regard these hand-held machines as game devices, Web browsers and messaging tools. But at heart they are like all computers before them. They are efficiency engines, a means of saving time, bridging distance, reducing cost.

Yet there’s something bizarre going on. Even as an estimated 130 million smartphones roam the U.S. streets, economists can’t quite find them.

via Why Aren’t Smartphones Making Us More Productive? –