Friday, December 31, 2010

Year-End Prediction and Videos

For the last post of 2010 I thought I’d make a safe prediction and point to a couple of good financial videos.

Prediction: In 2011, blogs and other media will be filled with reasons for why current conditions for different asset classes are different this time, but they will be wrong. The best ways to approach investing over the long term will continue to be the best ways into the future.

In his latest newsletter, Ken Kivenko included a couple of interesting videos. The first is a short funny video about mutual funds and the second is a clear explanation of what you’re up against when trying to beat the market.

Have a fun and safe New Year’s Eve.


  1. According to the second video, Wall Street can't beat the market and no mutuals funds beat the market. But the market is just the aggregate of Wall Street (including mutual funds) and ... who? Private investors? Since the "market" is an average and all of Wall Street is below average, someone has to be above average in order to create the average. Does that mean private investors are all beating the market?

    I really dislike the type of oversimplification presented in that video. First, this type of presentation doesn't question the assumption that everyone's trying to beat the market. It's a straw man argument. Since the market is an average, not everyone can beat it (and not everyone can lag it). Not everyone is trying to beat the market. Some people are investing for income. Others are investing for long-term inflation protection. Others own shares through corporate sponsored share purchase plans. Hedge funds, as an example, (that use a hedging strategy) don't mind underperforming the market some years, as long as they can return a steady 5% over inflation.

    What the argument comes down to, most often, is "you could save money by ditching your advisor." That's fine for some (maybe most) people, but there are people who don't mind paying to have their hand held and there are people who could buying an index, but want help choosing which index. Advisors shouldn't ever promise to beat the market. But if they can write a realistic financial plan and help a client achieve their goals, that's worth the price.

  2. @Robert: Wall Street is only below average because of the fees it charges. Before fees, Wall Street is roughly average. So there is no need for private investors (or anyone else) to be above average to "create the average".

    I don't believe that the video oversimplified the situation. Focusing on stocks only, there are index investors who aren't trying to beat the market and it is true that there are other investors focused on income. However, the dominant factor is the great many players who are trying to beat the market. Their presence causes the prices of these income-producing stocks to be efficient. All evidence says that collectively those trying to beat the market just match the market before fees. After all fees, commissions, etc., they lag the market.

    Most people would do well to get advice from a good fee-only advisor. Unfortunately, most people can't distinguish between a good advisor and the thundering herd of mutual fund salespeople. Anyone who can make this distinction can probably just pick his or her own indexes without help.

  3. Look for a good year for US equities. The third year in the presidential election cycle is traditionally good for the market. I think on average, returns are in the 20% range.

    Interesting statistic, though I don't consider it especially predictive. When it comes to the stock market I don't think of much as being particularly predictive.

  4. @Gene: I don't put much faith in presidential cycle patterns, but cosmology tells us that stock markets on earth aren't likely to do very well once the sun burns through enough fuel that it expands into a red giant. I call this the "year 5 billion problem".

  5. Thank you for sharing your theory. I would like to subscribe to your Y5B newsletter. I think we'd better put a DNA library on a space craft and send it to a more promising solar system.