Friday, December 21, 2012

Many Happy Returns

Jim Parker,
Vice President

The holiday season encourages media retrospectives about financial markets. It’s fun to match these up with what people were saying a year before.

In December 2011, Barron’s told investors to “buckle up.” The consensus prediction of its panel of ten stock market strategists and investment managers was for the S&P 500 to end 2012 some 11.5% higher, at about 1,360.1

“That sounds like a big gain, but a lot of things have to go right for the market to make such impressive headway,” the writer said. “Even the most bullish of these Street seers fears stocks could be more wobbly in the next six months than in the six months past.”

There was so much for forecasters to get right—the negotiation of the euro zone crisis, uncertainties over the growth of earnings, the roadblock of the US presidential election, and the challenge for emerging economies to sustain high economic growth rates.

Twelve months later, markets are still grappling with many of the same issues, though from different angles. Much of Europe is either in recession or growing only modestly, unemployment is high, and a number of countries that use the euro are unable to pay their debts. The US presidential election gave way to worries over the “fiscal cliff,” while Chinese exports have been hit by the slowdown elsewhere.

In the meantime, however, there have been solid gains in many equity markets, including parts of Europe and Asia, as well as North America. That Barron’s panel forecast of the S&P 500 reaching 1,360, which the magazine said was ambitious, now looks conservative. The index was 4% above that level by mid-December. What’s more, some of the strongest performances have been in emerging and frontier markets.

The table below shows performances for 2012 (through November 30) and annualized returns for the past three years for twenty developed and twenty emerging markets, using MSCI country indices. Returns are ranked on a year-to-date basis and expressed in US dollars.


Developed Markets (USD)
Hong Kong27.1%10.3%
New Zealand26.8%14.7%
United States14.3%10.7%
United Kingdom12.9%7.1%
Emerging Markets (USD)
South Africa7.9%9.2%
Source: MSCI country indices through November 30, 2012.

Among developed markets, three members of the seventeen-nation euro zone—Belgium, Germany, and Austria—were among the top ten best-performing equity markets this year. Leading the way among emerging markets was Turkey, which regained its investment grade ranking from agency Fitch in November.

While not one of the top performers, the US market still delivered positive returns in what many observers judged as a highly uncertain economic and political climate.

And while much of the media focus has been on the so-called BRIC emerging economies of Brazil, Russia, India, and China, the real stars in the emerging market space the past three years have been the Southeast Asian markets of the Philippines, Thailand, and Indonesia.

There are a few lessons here. First, while the ongoing news headlines can be worrying for many people, it’s important to remember that markets are forward-looking and absorb information very quickly. By the time you read about it in the newspaper, the markets have usually gone on to worrying about something else.

Second, the economy and the market are different things. Bad or good economic news is important to stock prices only if it is different from the information that the market has already priced in.

Third, if you are going to invest via forecasts, you need to realize that it is not just about predicting what will happen around the globe, but it is also about predicting correctly how markets will react to those events. That’s a tough challenge for the best of us.

Fourth, you can see there is variation in the market performance of different countries. That’s not surprising given the differences in each market in sectoral composition, economic influences, and market dynamics. That variation provides the rationale for diversification—spreading your risk to smooth the performance of your portfolio.

So it’s fine to take an interest in what is happening in the world. But care needs to be taken in extrapolating the headlines into your investment choices. It’s far better to let the market do the worrying for you and diversify around risks you are willing to take.

In the meantime, many happy returns!

1.  Vito J. Racanelli, “Buckle Up,” Barron’s, December 19, 2011.

Dimensional Fund Advisors LP ("Dimensional") is an investment adviser registered with the Securities and Exchange Commission.
All expressions of opinion are subject to change without notice in reaction to shifting market conditions. This article is provided for informational purposes, and it is not to be construed as an offer, solicitation, recommendation or endorsement of any particular security, products, or services. 
©2012 Dimensional Fund Advisors LP. All rights reserved. Unauthorized copying, reproducing, duplicating, or transmitting of this material is prohibited.

Monday, November 26, 2012

It's Picture Day - Again!

Remember "Picture Day" back in school?  Did you love it?  Did you dread it?  Well, we loved "Picture Day" so much that we like to relive it every few years.  Lucky you - the results will soon appear on our website.  This picture, however, isn't likely to make the final cut...
A distinguished group, don't you think??

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Tuesday, November 20, 2012


We did it!  We finished the Two Cities Marathon &Half .  Bruce did the full marathon (26.2 miles) while the rest of us did the half (13.1 miles).  By the way, Bruce completed it carrying a flag pole with the black “Prisoner-Of-War, Missing-In-Action” flag.

There was a lot of apprehension (and complaining) leading up to the event.  Most of us had never done anything like this before.  In the end, we all had a lot of fun.

Special thanks to:
-          Bill Flayer
-          Sherry Smith
-          Kathy Karst
-          Kristin Davis
-          Kyle Nelson
They joined us on this journey.

“I am glad we all stuck with it and finished.  It was a well-organized event with lots of “buzz” and energy.  It was a great experience.  I would love to do it again but I have twelve months to work on my excuses.”  - Dustin Smith

“When I signed up to participate just weeks before giving birth to my son, I thought I might be a little crazy!  Even though I wasn’t able to train as much as I would have liked, I am still proud of myself for completing it.  The atmosphere and energy on the day of the race really kept me going; it was uplifting to be a part of such community camaraderie. “ - Tiffany Domenici

“After months of training, a last minute injury made it impossible for me to run on marathon day.  I walked instead. This experience was a lesson to me that sometimes in life you will not meet your expectations, despite your best efforts. Although there will be disappointment, it is important to rejoice in the journey (just as much as the destination), and be proud of how far you’ve come.” – Michelle Carter

“26.2 miles with a flag only represents a fraction of the gratitude that I have for our veterans.  Especially our POW’s and MIA’s.  You are not forgotten.” – Bruce

“For the training, I found the most motivation by simply hearing what others in the office were going through and accomplishing. As for the actual event, most of my motivation came from seeing everyone out there doing their “thing”.” – Katie Sanders

“This was a great experience to have everyone in the office complete the event.  The funniest part was watching everyone limp around the office the next few days.” – Jeff Karst

“It was inspiring to watch my coworkers prepare for and complete something many thought they’d never even attempt. Even better to hear that some plan to give it another go in the future.” – Nicole Cox

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Thursday, November 15, 2012

Office Holiday Hours

The Pathways Advisory Group, Inc. office will
be closed for the following holidays:

Thursday, November 22, 2012

Friday, November 23, 2012

Monday, December 24, 2012

Tuesday, December 25, 2012

Tuesday, January 1, 2013

Monday, January 21, 2013

Monday, February 18, 2013

Friday, March 29, 2013

Monday, May 27, 2013

Thursday, July 4, 2013

In case of emergency, please contact Schwab directly at 1 (800) 515-2157.

Happy Holidays!

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Wednesday, October 10, 2012

Another Wall of Worry

Weston Wellington,
Down to the Wire
Vice President



October 3, 2012

Stock prices rallied sharply around the world in the third quarter, with forty-two out of forty-five countries tracked by MSCI showing positive returns in US dollar terms. Total return exceeded 10% in nineteen different markets, while Ireland, Japan, and Morocco registered minor losses.

For the twelve-month period ending September 30, 2012, forty markets had positive returns, with six countries—including the US—delivering a total return in excess of 30%, according to MSCI.

Investors have been confronted with a steady drumbeat of discouraging news over the past year—a feeble economic recovery here and abroad, staggering budget deficits with no solution in sight, the prospect of a Eurozone breakup, an acrimonious presidential election campaign, banking scandals, and a punishing drought across the US. Considering all the uncertainty, it's not difficult to explain why mutual fund investors have generally favored fixed income strategies rather than equities over this past twelve-month period.

Many investors are easily persuaded that successful investing requires constant attention to current events and frequent adjustment of their equity exposure. The news excerpts below represent just a small sample of the issues investors might have dwelled on. We suspect that many investors not only failed to achieve their respective market rate of return over the past twelve months but would be surprised to learn how well stock prices have done in many markets over that period.
  • "Unless politicians act more boldly, the world economy will keep heading toward a black hole… At a time of enormous problems, the politicians seem Lilliputian. That's the real reason to be afraid."
"The World Economy: Be Afraid," Economist, October 1, 2011.
  • "Investors also are nervous because October historically has been one of the more volatile months for stocks."
E.S. Browning. "Market Nears Bear Territory," Wall Street Journal, October 4, 2011.
  • "The Dow Jones Industrial Average turned in its worst Thanksgiving-week performance since markets began to observe the holiday in 1942."
Steven Russolillo. "Investors Go Shopping—Just Not for Stocks," Wall Street Journal, November 26, 2011.
  • "Over the past three months, investor uncertainty about the soundness of bank balance sheets, manifested in the daily volatility of stock prices, is back up to levels seen historically only in advance of two great crises… This dynamic has played out twice before in the past 85 years—in the Great Depression and the panic of 2008-09—with devastating consequences for the broader economy."
Andrew Atkeson and William E. Simon, Jr. "The Rising Fear in Bank Stock Prices," Wall Street Journal, November 28, 2011.
  • "The managing director of the International Monetary Fund has raised fears that the world faces the risk of economic retraction, rising protectionism, isolation, and… what happened in the '30s (Depression)."
Hugh Carnegy and George Parker. "IMF Chief Warns over 1930s-Style Threats," Financial Times, December 16, 2011.
  • "It is hard to avoid the conclusion that stock prices are levitating at over-inflated values, thanks to the herd-like behavior and collective fear of investment institutions."
Financial Times, December 30, 2011.
  • "An escalation of the crisis would spare no one. Developed and developing country growth rates could fall by as much or more than in 2008-09."
Quotation attributed to Andrew Burns, head of macroeconomics, World Bank. Chris Giles. "World Bank Warns on the Risk of Global Economic Meltdown," Financial Times, January 18, 2012.
  • "This may be the unhappiest bull market ever. We love to hate it, but that may be just egging it on."
Tom Petruno. "The Unhappiest Bull Market Ever," Los Angeles Times, February 12, 2012.
  • "US companies are more uncertain about the future than at any point since the financial crisis, with just one in five of the biggest corporations making any predictions as they published quarterly results."
Ajay Makan. "Doubt Haunts US Company Results," Financial Times, February 21, 2012.
  • "For nearly a decade, it turns out, the most accurate forecasts have come from the fringe. So it's upsetting to learn that many of these Cassandras now believe, for different reasons, that we are on the brink of another catastrophe that may be far worse."
Adam Davidson. "Sorry to Break It to You," New York Times, February 5, 2012.
  • "It remains clear that this almost uninterrupted equity market lacks substance and conviction. The rally's volume has been very weak, and institutional operators have been absent from the market. There has been very little participation from the retail investor, based on data from Lipper, a provider of information and ratings on mutual funds. Corporate insiders have been big sellers of stock, exceeding $6 billion last month (with the ratio of selling to buying hitting the astronomical 13-to-1 mark)."
David Rosenberg, chief economist and strategist, Gluskin Sheff. "The World is Not Fixed and This Equity Rally Lacks Conviction," Financial Times, March 15, 2012.
  • "No one sees a growth rate fast enough for the American economy to return to full employment any time soon."
Joseph Stiglitz, Nobel laureate 2001. "The American Labour Market Remains a Shambles," Financial Times, March 13, 2012.
  • "We think that most of the US market is just not worth investing in… And it's our belief that profitability will have to come down and the market isn't priced for it."
Quotation attributed to Ben Inker, head of asset-allocation group, Grantham, Mayo, Van Otterloo. Jonathan Cheng. "Two Pros Weigh In on US Stocks," Wall Street Journal, April 2, 2012.
  • "It's simple arithmetic and it leads to a simple yet alarming conclusion that unless current law is amended before year-end, the stock market has to fall by at least 30%."
Donald J. Luskin. "The 2013 Fiscal Cliff Could Crush Stocks," Wall Street Journal, May 4, 2012.
  • "Stocks have not been so far out of favor for half a century. Many declare the 'cult of the equity' dead."
John Authers and Kate Burgess. "Out of Stock," Financial Times, May 24, 2012.
  • "The US economy is continuing to lose momentum just as global events that could derail the recovery gather steam… The downshift couldn't come at a worse time. Experts warn that a breakup of the euro zone could spark the worst credit freeze since the collapse of Lehman Brothers in 2008."
Ben Casselmann and Phil Izzo. "Recovery Slows as Global Risks Rise," Wall Street Journal, June 16, 2012.
  • "'Dr. Doom', Nouriel Roubini, says the 'perfect storm' scenario he forecast for the global economy earlier this year is unfolding right now as growth slows in the US, Europe, as well as China."
Ansuya Harjani. "Roubini: My 'Perfect Storm' Is Unfolding Now," CNBC, July 9, 2012.
  • "Bill Gross, co-founder and co-chief investment officer of Pacific Investment Management Co., says stock investors should rethink the age-old investing mantra of buying and holding stocks for the long run… Stocks, he says, operate much like a Ponzi scheme, showing returns that have no real bearing on reality."
Steven Russolillo and Kirsten Grind. "Bill Gross: Stocks Are Dead and Operate Like a Ponzi Scheme," Wall Street Journal, August 1, 2012.

Dimensional Fund Advisors LP ("Dimensional") is an investment adviser registered with the Securities and Exchange Commission.
All expressions of opinion are subject to change without notice in reaction to shifting market conditions. This article is provided for informational purposes, and it is not to be construed as an offer, solicitation, recommendation or endorsement of any particular security, products, or services. 
©2012 Dimensional Fund Advisors LP. All rights reserved. Unauthorized copying, reproducing, duplicating, or transmitting of this material is prohibited.

Tuesday, September 4, 2012

Value of Time

Pathways Advisory Group, Inc.
Jeff Karst, Associate Planner

In finance, we often talk about the Time Value of Money.  The basic premise is that a dollar today is worth much more than a dollar in 10 years.  What about the Time Value of Time?  Is your time more valuable today than it will be in 10 years?  We tend to value “today” more than “tomorrow”.

How much is your time worth?  It’s a question I ask myself constantly.  

Outside of work, I consider my time in two different ways.  One: The time after work, before my daughters go to sleep is the most valuable to me.  It’s priceless!  There is not much else I would rather do than spend that time with my daughters.  Two:  After my girls go to sleep, that’s the time for TV, home improvement, or whatever else.  That time doesn’t have as much value.  I can spend that time doing most anything.  (Weekends are a whole different story.)

When is your time most valuable to you?  Is it spending time with your family?  Shopping with your friends?  Dinner with your spouse?  Whatever it is, I encourage you to focus on that time.  Those are the moments to capture.

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Friday, August 17, 2012

The Tax Debate

Pathways Advisory Group, Inc.
Dustin Smith, CFP®

“America is a land of taxation that was founded to avoid taxation.” Laurence J. Peter

What is the proper level of Taxation?  What is “fair”?  What is most beneficial to the economy?  How will the economy react to a change in Tax Policy?  Do higher Tax Rates increase Tax Revenue?   These are tough questions facing every nation.   There is plenty to debate and lots of history to consider.  The history of taxation in this country is full of experiments.  Why is it so contentious this time?  Because of the economic backdrop.  Because of philosophical differences.  Because behavioral responses (to a change in tax policy) are difficult to predict.  Because the “facts” are hard to find.  Because we are dealing with two incredibly complex systems, taxation and economics.  If you are interested in the debate, take a look at this article from the Wall Street Journal.    

For a deeper look, the Laffer curve provides some of the theoretical backdrop for this discussion. 

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Tuesday, July 31, 2012

The Greatest Hits of Investing

Brad Steiman,
Head of Canadian Financial Advisor Services
Vice President
Financial Advisor Services,
Dimensional Canada

July 2012

“. . . Investing is like music in that true classics stand the test of time and remain relevant long after they were initially composed.”

For more than a decade, I have had the privilege of hearing many colleagues discuss the fundamentals of investing in simple and effective ways. Everyone puts their own words and music to this set of ideas, but the following are what I consider the top ten greatest hits, with a few of my own verses added to the mix. Greatest hits aren’t new, by definition; therefore, this article merely aims to chronicle and arrange them in a storytelling sequence, where one connects to the next, rather than in order of importance or priority. Trends change and fads come and go, but investing is like music in that true classics stand the test of time and remain relevant long after they were initially composed.

Consider the questions people ask upon learning you are a financial advisor. “What stock should I buy?” is a common response. They want to know if you can help them discover the next Apple. Another frequent request is, “Where do you think the market is going?” They want to know if now is a good time to be invested in the market, or if they should bail out of stocks instead. If you have no answer, then surely you know a hot money manager or can identify the next Peter Lynch for them. 

All these questions share something in common—you are being asked to make a forecast! Therefore, conventional thinking seems to be that, in order to have a successful investment experience, you must look into your crystal ball and predict the future.

There is a completely different approach that all investors should at least be aware of, and it wasn’t developed by the big banks and brokerage firms on Wall Street. It originated and evolved in the halls of academia and is based on a mountain of evidence showing that free markets work because the price system is a powerful mechanism for communicating information. As F.A. Hayek pointed out in his Nobel laureate lecture, “we are only beginning to understand how subtle and efficient is the communication mechanism we call the market. It garners, comprehends and disseminates widely dispersed information better and faster than any system man has deliberately designed.”1 

What does this mean in the realm of fiercely competitive capital markets? Simply, that prices are fair. Competition among profit-seeking investors causes prices to change very quickly in response to new information, and neither the buyer nor the seller of a publicly traded security has a systematic advantage. Therefore, the current price is our best estimate of fair value.

Despite the strength of market forces, many investors may never lose the urge to form an opinion about the future, or to ask their advisor for one. However, if you choose to offer your outlook for the future, it should be followed by a reminder that you don’t make investment decisions based on an opinion—yours or anyone else’s. If the compulsion to act on an opinion is too difficult for your investors to resist, ask them if it is conceivable that they are the only one with the information upon which their opinion is based. If the answer is no and the information is widely known, then why wouldn’t it already be reflected in prices? For example, the claim that “everyone knows interest rates are going up” should be met with the fundamental premise that if the statement were literally true, rates would have already gone up! The logic behind how markets work is a formidable response to any forecast of the future.

Not only is this logic formidable, but the evidence supporting it is also compelling. If free markets fail, it would be easy for investors to systematically beat the market, but in reality, man versus the market isn’t a fair fight and most of us should accept market forces rather than resist them. There is a large literature devoted to analyzing the results of professional money managers. It dates back over four decades to the original study of its kind conducted by Michael Jensen in 1968. The experiments have been repeated many times with better models applied to larger and more reliable data, but the results continue to confirm the original conclusions. As you’d expect, some managers are able to beat the market on a risk-adjusted basis, but no more than you would expect by chance.   

Furthermore, it must be the case that, in aggregate, investors earn market returns before fees. This doesn’t just hold over the long run, but at every instant due to the adding up constraint. The market reflects the collective holdings of all investors, so the value-weighted average investment experience must be the market return minus fees and expenses. This is not just a theory; it is a universal unconditioned truth relying solely on simple arithmetic.

This arithmetic leads many investors to think that, since money managers aren’t like children from Lake Wobegon (who are all above average), a winning investment strategy attempts to identify above-average managers and avoid all the others. But can you systematically identify in advance managers who will outperform the market after adjusting for the risks they took? Although it is hard to imagine there aren’t skillful managers, the challenge facing investors is that true skill is hard to distinguish from pure luck. 

Identifying managers who have outperformed in the past is just as easy as looking up the scores from last night’s sporting events, but there is very little persistence in the performance of managers and no documented way of determining who will outperform in the future. Most regulators require sales communications to contain the disclaimer that PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS with good reason. Regrettably this warning sign is treated like a posted speed limit and dismissed with flippant regularity.

This doesn’t mean professional money managers are stupid! There are undoubtedly many smart ones who take their job very seriously and work hard to get the best results they can for their clients. But the market is hard to beat because there are so many smart managers—and not in spite of it. If you take the world’s greatest bass fisherman to a dry a lake, he won’t catch any fish. He’s still the world’s greatest bass fisherman, but that’s beside the point if there isn’t anything to catch.

It is not necessary for someone to have a lousy investment experience for you to have a successful one. Everyone can win because with capitalism there is always a positive expected return on capital. The expected return is there for the taking, and as a provider of capital, you are entitled to earn it. That doesn’t mean it’s guaranteed to be positive, but only that it is always expected to be positive.

Realized returns are uncertain because the market can only price what is knowable. The unknowable is by definition new information. If it is considered bad news, or if risk aversion increases and investors require higher expected returns, then prices will drop. This is the market mechanism working to bring prices to equilibrium where, based on the new information, the expected return on capital remains positive and commensurate with the level of risk aversion in the market. The opposite would be true if the new information is considered good news or if risk aversion declines. This is how well-functioning capital markets maintain a strong and pervasive relationship between risk and expected return. There is no free lunch.

But stocks and bonds don’t all have the same expected return. Conventional wisdom says that if you want better returns, you must uncover the limited number of truly outstanding companies. In other words, the stocks and bonds of these “excellent” companies, based on their superior fundamental measures (e.g., return on assets, earnings to price, etc.), should have a higher expected return than the stocks and bonds of “unexcellent” ones. While this implies an “excellent” company should pay a higher interest rate if it borrows money, intuition suggests that lenders will assess the strength and relative riskiness of borrowers and charge the riskier unexcellent ones higher rates. The same concept should apply in the stock market. 

The market is a closed system where there must be a buyer for every seller and an owner for every stock and bond. There are no orphaned securities! It is mathematically impossible for investors to collectively limit their holdings to the stocks or bonds of excellent companies, so the riskier companies must offer an incentive for investors to buy (or continue to hold) their stocks or bonds over those of a safer company. The incentive comes in the form of higher expected returns. The market is not fooled, but rather, rationally pays a higher price for—and accepts a lower expected return from—the stocks and bonds of excellent companies, and vice versa. Therefore, the unexcellent company has what is referred to as a higher cost of capital, which is equivalent to the investor’s expected return.2

However, not all risks generate higher expected returns. Markets only compensate investors for risks that are “systematic” and cannot be eliminated. For example, the Green Bay Packers won’t pay Aaron Rodgers more money to play football without a helmet. It is a risk that can easily be avoided if he puts on his helmet and buckles up the chin strap! Similarly, investors shouldn’t expect an additional reward for taking the risk of concentrating their portfolio in a few securities, industries, or countries because the increased risk of doing so is easily eliminated through effective diversification. 

To diversify effectively, investors allocate capital across multiple asset classes around the globe to suit their unique circumstances, financial goals, and risk preferences. Ineffective diversification, on the other hand, includes concentrating a portfolio in a few securities, diversifying by broker, or dividing up assets among money managers in an uncoordinated way that does not eliminate risks they shouldn’t expect compensation for bearing.

Travelling the road to a successful investment experience requires more than just a map. Building a portfolio that puts these ideas to work is one thing, but staying on route is something else altogether. Keeping your hands on the wheel and your eyes on the final destination requires the emotional discipline to execute faithfully in the face of conflicting messages from the media and the investment industry. 

Investors are bombarded with information designed to lead them off course and toward more conventional means that involve excessive trading, higher costs, and frequent detours based on the latest prognostication from talking heads or so-called gurus.   

The simple message to let capitalism be your guru quickly becomes stale and completely lost among the attention- grabbing headlines of the day. A constant reminder that the media is in the entertainment industry and their objective is not to give sound advice but to attract an audience may help tune out the noise.  

 Tuning out the noise is even harder when it is amplified by an investment industry thriving on complexity and confusion, while frequently shunning simple yet effective solutions.   After all, the most lucrative products to sell are often the ones in which investors don’t really know what they are getting or how much it costs.

Investors ought to periodically review their plan and stick to it if the approach is still the right one. But adhering to a prudent investment strategy often becomes elusive in a world of continually streaming news and complex investment products.  These forces can overwhelm human emotion and lead many investors astray.   
A vast amount of research into how the human brain is wired documents tendencies known as behavioral biases. These biases make even highly intelligent investors particularly susceptible to the conventional approach of Wall Street and the messages purveyed by the media. An entire field of study known as behavioral finance, a mix of economics and psychology, has discovered biases that influence investment decisions. They have technical names like overconfidence, mental accounting, regret avoidance, extrapolation, and self attribution bias. What do they all mean? In a nutshell, investors may not be rational, but they are normal—meaning they’re often their own worst enemy.

A prudent investment approach following these fundamentals is like a steady diet of healthy food—simple, effective, boring, and difficult to maintain. It is well documented that good food, exercise, avoiding too much alcohol, and sufficient sleep will improve the odds of being healthier. It is also well documented that accepting that markets work, avoiding stock picking and market timing, effectively diversifying a portfolio, and paying attention to costs will improve the odds of being wealthier. It sounds simple, but it isn’t easy.

The helpful comments of Eduardo Repetto are gratefully acknowledged.

1.         Friedrich August von Hayek, “The Pretence of Knowledge”
 (lecture to the memory of Alfred Nobel, December 11, 1974)
1974/hayek-lecture.html/ (accessed July 6, 2012).

2.         The excellent vs. unexcellent example provides a simple explanation of pricing (i.e., expected returns) based on risk, but risk is technically not that of the company by itself but of the company in the overall portfolio. For example, if you are a bank and have loans to many excellent companies in the same industry, you may lend at the same rate to an excellent company in the same industry or an un-excellent company in a different industry.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. This article is provided for informational purposes, and it is not to b construed as an offer, solicitation, recommendation or endorsement of any particular security, products, or services.
©2012 Dimensional Fund Canada ULC. All rights reserved. Unauthorized copying, reproducing, duplicating, or transmitting of this material is prohibited.