An Investor’s Meanest Foe

For the over five decades that I have counseled individual investors like you, I have consistently advised the ruthless elimination of emotionalism from one’s financial affairs. Emotionalism is an investor’s meanest foe.

How do you eliminate emotionalism from your investment decisions? There are many facets to emotionalism, but as I wrote to my investment strategy report subscribers twenty years ago, one simple way to defeat emotionalism is to take a more hands-off approach.

Events of the moment should never be part of the investment mix. I price my portfolio once a year at tax season (because I must). Beyond this tax-related housekeeping chore, I pay little attention to prices. Most of what I own, I have owned for a long time. I know how things are going month to month and find it counterproductive to rustle through my holdings regularly. You’ll be amazed at how comfortable you can become with a hands-off approach. You sure as heck will pay a lot less in commissions and taxes. And you will defeat what is every investor’s meanest foe—emotionalism.

Some may scoff, but for many, the seemingly innocent act of tracking daily portfolio fluctuations can trigger the type of emotionally charged investment decisions that sabotage portfolio performance.

I have learned that through decades of in the trenches work with investors, but academic studies also show that the more often an investor reviews his holdings, the less likely he is to craft a return-maximizing portfolio.

A hands-off approach remains the mandate today.

Originally posted May 25, 2018.

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Learn How Risk Reward & Time Are Related

You cannot possibly save properly for retirement without a thorough comprehension of the miracle of compound interest and the value of time.

I like the materials Vanguard has prepared to introduce the risk, reward and time theory to retirement Investors.

Click here to kick start your mission to retirement security.

You will be glad you did.

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Are You Sitting the Bench When You Should Be Winning the Game?

Last week I explained that I don’t miss the boat because I’m always in the boat. The post was an outline of my long-time philosophy for remaining fully invested so as not to miss the best times of market performance. My avoidance of market timing isn’t simply intuitive. In fact, in December 1991 I detailed some of the research on which I based that philosophy. I wrote:

Your Biggest Mistake in Investing Is to Market Time

You don’t want a fund that is an active trader. Market timing does not work; it’s a fool’s game. Forbes presented one version of the case well in its issue of 28 October 1991. The article explains a study done by professors Chandy and Reichenstein. The study examines monthly stock returns for the S&P 500 from 1926 through 1987. It found that “if the best 50 months­—only 6.7% of the total time period—were deleted, the S&P’s entire 62-year return disappeared.”

The Ibbotson studies covered market return from 1946-1990. They showed that $1 invested in stocks in 1946 grew to $130.52 in 1990. If, however, the 30 best months were taken out, $1 grew to $8.88 versus $8.43 for T-bills. Stocks barely beat T-bills over 44 years, without those critical 30 months.

Do you now see how terribly dangerous it is to be on the sidelines during the precious few really good months in the long, long stock market cycle? You, I know, intuitively believe that you can market time, or at least that Dick Young can for you. It ain’t so. The biggest mistakes I’ve personally made in the market have been being on the sidelines at the wrong time.

Selling out into cash is not the best action investors can take to prepare their portfolios for times of turbulence. Instead they should seek to develop a diversified portfolio that attempts to minimize and counterbalance risks in order to ride out volatility.

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I Don’t Miss the Boat, Because I’m Always in the Boat!

Market volatility is up, and any time that happens I get asked one question more frequently: “Is it time to sell it all and wait?” My answer is an emphatic no. Attempting to time the market by selling out and buying in is a great way to miss the best days and months of the market’s performance. Instead I recommended in May of 1991 that investors prepare ahead for market volatility by focusing on stocks with low betas. I wrote:

In the stock market the words risk and volatility are synonymous. I want you to concentrate most of your efforts on stocks that are less volatile than average.

What you need to know is a stock’s beta, or the measure of its volatility. A stock with a beta of 1.0 has characteristics of volatility that equal the average stock. A stock with a beta of 0.8 is only 80% as volatile as most stocks. A stock with a beta of 1.3 is 30% more volatile than most stocks.

You want to achieve your 20% goal with as little volatility as possible. You will sleep better with less volatility and you will be able to ride out market downturns fully invested with a large degree of comfort. You will be most comfortable with stocks that have betas of 1.0 and less.

Remember, over time the stock market advances in seven of every ten years. Over the years, my biggest failures have come from missing the boat or being under-invested during major market moves. When times were tough, I missed the boat because I was too hesitant to invest, and during recession I was under-invested. No more. Today, I never miss the boat because I am always in the boat, and I want you to remain in the boat along with me. It is simply a matter of ensuring how you are balanced in the boat so as not to be rocked out in rough water.

If you need help crafting a portfolio that minimizes risk and focuses on generating income, you can complete the form below. You will be contacted by a seasoned advisor from my family-run investment counsel firm, Richard C. Young & Co., Ltd. The advisor will perform a portfolio review—completely free and without obligation—explaining the programs being offered to help investors meet their goals.

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Write These Six Words Down

If you are looking for the best advice I can give anyone getting started in investing, you’ll need to travel back to November 1989. At the time, I was debriefing on the Blanchard’s NCMR New Orleans Investment Conference of that year, at which I had spoken. An attendee asked me a question, and my answer included the six most important words in investing. I wrote of the scene:

THE MOST IMPORTANT WORDS IN INVESTING

I’ve just returned from speaking at the biggest investment conference in the U.S. I now speak at only one national conference per year, and Blanchard’s NCMR annual extravaganza is clearly the place to be. My “Double Your Money” seminars were packed with Intelligence Report subscribers, and I was delighted to personally meet so many of you. The seminar/workshop format is an excellent forum for in-depth strategy discussions and detailed answers to subscriber questions.

Most of Us Are Risk-Averse

What questions were asked most often? Over three-quarters of the queries had to do with zero-coupon bond strategies, risk/reward, and interest rates in general. Indubitably the majority of conference attendees were risk averse and looking for ways to make money while sleeping well in the process.

One woman from the Midwest asked me what I thought were, in just a few words, the most important guidelines in investing. My short reply: “full faith and credit,” and “compound interest.”

Write those six words down and remember them when you set out to review your family financial plan.

I urge you today, as I did then, to make compounding and fixed income the corner stones of your investment portfolio.

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The Antidote to Inflation Poison

In my long investment career, nothing has worked harder against my success than the negative compounding effect of inflation. Every year inflation reduces the value of the money I have worked hard to save, and impedes my progress in reaching my investment goals. In March of 2010, I explained to readers the effects of inflation I had seen in my lifetime. I wrote:

Nickels & Dimes

You may have had a similar experience growing up to the one I’m about to tell you. The early 1950s was a great time to be a kid, even more so for me in Cleveland Heights, Ohio, with Paul Brown and Otto Graham leading the Browns.

Often on Saturday afternoon, my brother and I would walk to the movie theater from our house on Birch Tree Path to watch those old-time black-and-white cowboy Westerns featuring Johnny Mack Brown, Tim Holt, Bob Steele, and Ken Maynard. My mom would give us 30 cents each, just right for a Saturday matinee ticket (10 cents), popcorn (10 cents), and a Pepsi (5 cents).

The remaining 5 cents was for Topps baseball cards from the corner store near Noble Elementary. I still have my original collection of Topps baseball cards, albeit sans the colorful wax packaging and the sugardusted pink bubblegum slabs. Topps had just gotten going in the early ’50s and had largely replaced the much better, for my money, Bowman cards.

Savage Inflation

So that’s what 30 cents bought 57 years ago. Today at our super little Tropic Cinema in Old Town Key West, a matinee is $9, popcorn is $3, and Pepsi sells for $2. Baseball cards can run $2.50/pack. In the early ’50s, Pepsi ran a slogan that said, “Twice as much for a nickel, too/Pepsi-Cola is the drink for you.” Pepsi’s large bottles were around even back in the early ’50s. So let’s add it up. $3 + $9 + $2 + $2.50 = $16.50. Depending on where you live, your grand total will be somewhat different from mine. But let’s not quibble. Today we are all paying over 54-to-1 the cost of the early ’50s. That’s some savage inflation and dollar depreciation regardless of how you want to work the math.

To avoid the savage effects of inflation, I focus my equity investments on companies that not only pay out regular dividends, but also regularly increase those dividends. The steady collection and compounding of such shares can work as an antidote to the poisonous effects of inflation in your portfolio. Make sure you have a plan in place to build an inflation fighting portfolio today.

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How the Rolling Stones Amassed a Fortune Where Others Have Failed

Last week Mick Jagger shared some video of his cardio workout routine. There he was dancing and moving to the music like only Mick can. Jagger was showing the world that, despite recent heart surgery, he is not slowing down. After years of hard touring and the excesses of the rock and roll lifestyle, Mick, Keith, and the rest of the Stones remain vital. During decades of near constant work, during which many of their contemporaries have failed, they have amassed fortunes. I described their investing process back in January of 2003. I wrote:

Geezers in Wheelchairs…

This year is the 40th anniversary of the world’s greatest rock & roll band—the Rolling Stones. Grizzled but game, the Stones truck on with their 15th North American tour. “Always precocious, the Stones at 60 look a lot like Segovia at 90: Keep the morgue on standby,” wrote the very funny Joe Queenan in the WSJ. The Stones are big business, real big business. As Fortune noted in its recent cover story, “The Stones have made more money than U2, or Springsteen, or Michael Jackson…or the Who—or whoever.” The topgrossing North American tour of all time was the Stones’ 1994 Voodoo Lounge tour. With a gross of over $120 million, these guys know how to make money and how to keep it. Jagger went to the London School of Economics.

For me and perhaps for you, the really big news on the Stones is the recent hybrid (two layers) SACD release of the band’s pre-1971 material owned by Allen Klein and his ABKCO Records (the Stones’ longtime early label). Over the years, ABKCO has had many requests to reissue these titles using the latest digital remastering techniques. Until now, ABKCO did not feel that improvements in the mastering warranted reissue.

A New and Exciting Technology

So what has changed? A new and exciting technology has been introduced by Sony and Philips (inventors of the CD). The new discs have two layers. One is a normal CD. The other is a Super Audio CD (SACD). Both layers benefit from Direct Stream Digital (DSD) encoding, which captures every nuance of the original master tapes. You will hear the “‘rawness’ of the guitars, the vocal quality and the natural distortion of the band as it sounded in the studio.” Best of all, you can hear it on any CD player you own today or on any SACD-compatible player. The Stones’ CD to start with is Out of Our Heads with “Satisfaction,” “Mercy, Mercy,” “Hitch Hike,” and “The Last Time” (ABKCO 94292).

Rock-Solid Investors

Not only are Mick Jagger and Keith Richards the band’s two key writers, musicians, and performers, but they are also serious investors. In Fortune’s great article, Keith, in his inimitable way, told Andy Serwer, “I have a small portfolio. I find things I love, like houses—bricks and mortar. Nothing wrong with a bit of land.” A sound statement from a fellow few felt would live to invest in anything, never mind “a bit of land.” In fact, as Fortune noted, the Stones’ “Steel Wheels [tour] had to be insured—Lloyd’s covered Stones tours—and before the insurer would issue a policy, the band had to take physicals. Keith passed, legend has it, to his own astonishment.”

The Golden Loom

Over the last decade, Mick and Keith have made nearly $60 million in royalties on the over 200 songs they have written together. And these so-called performance rights will key Mick’s and Keith’s future wealth accumulation. Even as they sleep, their music plays on turntables, CD players and jukeboxes around the world, spinning an ever-building pile of golden performance royalties.

Compound Interest Key

As time passes, the combination of compound interest and sensible investing makes Mick and Keith wealthy beyond the dreams of most performing musicians who, in that they are not music writers, never benefit from the awesome power of performing rights and compound interest. Mick and Keith, along with running mates Ronnie Wood and Charlie Watts (now a crotchety 61 years old), have indeed approached the geezers-in-wheelchairs stage for most performers. But somehow the Stones defy time and roar forth at the top of their game as the world’s greatest rock & roll band.

Cold, Hard Cash

You, of course, don’t need to be in the financial league of Mick Jagger and Keith Richards to benefit from the awesome power of compound interest. You do, however, have to have something to compound. It is for this reason that I have been shifting names in the Monster Master List to only investments that pay you cold, hard cash today. I’m referring to either interest from fixed-income securities or dividends from common stocks.

If your portfolio isn’t generating income, you should take some time to study the value of dividends and compounding. Visit www.younginvestments.com and download Dividend Investing: A Primer from the home page. Read the free whitepaper and put the power of compound interest to work for you today.

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No Second-Guessing, No Deviation from Focus

Here’s what I told you, all the way back in February of 2015: stay fully invested. I wrote:

Stay Fully Invested

As I’ve written ad nauseam, I do not get in and out of the markets. I maintain my fixed income/equities balance, adjusting as time passes (fast) for my age. For an investor who is crafting a dividends/interest-oriented portfolio to pass along to heirs, I can live with a 75/25% equities/ fixed income mix. But where income and safety in retirement is the target, the reverse ratio is optimal—no second-guessing, no deviation from focus, and no market timing to be tolerated.

PPPP—Your Guide

I think a policy of PPPP will keep you and your family on a proper track. Here I am referring to my goal to Preserve and Protect via Perspective and Patience. If my PPPP immediately strikes you as a theme that makes you warm and fuzzy, I am excited for your future success. If instead such a seemingly boring approach leaves you cold, you still have my warmest regards, but also my great concern for your future success.

If your investment plan is strong, you shouldn’t be tempted to second-guess it, or deviate. A good plan will prepare you for the risks you’re willing to endure given your time horizon. If you need help crafting such a plan, request a free consultation with a member of the seasoned investing staff at my family-run investment counsel firm, Richard C. Young & Co., Ltd. by clicking here. Once contacted, you will be guided through a no-obligation review of your portfolio by an experienced professional. You too can build an investment plan that requires no second-guessing.

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Avalanche! It Is Astonishing How Your Money will Pile Up

There is little as satisfying as the long-term gratification felt after planning ahead, saving, and reaping the rewards of your efforts. The best way to achieve that euphoria is to harness the power of compound interest by purchasing stocks and bonds that pay you a steady stream of income. Then put that income to use by compounding it, over and over again like an avalanche. In June of 2016 I encouraged investors to harness this “avalanche of return.” I wrote:

An Avalanche of Return

The most important aspect of investing for the long term is—without a doubt—compound interest. The act of compounding your investment over time creates an avalanche of returns that turns a small initial investment into a cascade of cash payments your family can rely on during good times and bad. And there’s no better time to get started than today. Like an avalanche, high initial dividends—once reinvested—will accelerate the profit generation of your portfolio.

At www.youngresearch.com, we post regularly on the awesome power of compound interest. In our latest compound interest post, we illustrate for readers the exponential increase in profits that compounding can deliver to you. Here’s an excerpt: “As each rate of return doubles, your profit more than doubles. When you compound at 2% for 20 years, your profit is 2.2X your profit when compounding at 1%. And when you compound at 8% for 20 years, you have more than 3X the profit that you do when you compound at 4%. Double your return again, which is admittedly unrealistic over a 20-year period, and your profit is 5X your profit when compounding for 20 years at 8%.”

That logic doesn’t only apply to dividends, but it illustrates well the benefits of higher yields. On the chart below, you can see the differences in profit as returns move from 2% to 4%, and from 4% to 8%. It is astonishing how your money will pile up when given time to compound.

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The Most Frequently Asked Investor Question

Throughout my years in the investment industry, the question most frequently asked by clients is probably “How are we doing?” In June 2015 I explained how I answer that question. I wrote:

How Are We Doing?

Throughout my first 28 years in the investment industry, I worked in the trenches, talking daily with clients and the financial media, as well as speaking at investment seminars around the world. All that changed in 1992, when I decided to move off the front lines and concentrate exclusively on research and writing, and Debbie and I moved to Key West, only 90 miles from Cuba. Hard to believe, but it has now been 23 years since I made that transition.

Concentrating on One Question

Taking stock as I set up to write this month, I decided to concentrate on one of the frequently asked questions from clients over the years. From my memory bank, the ranking #1 question was, how are we doing? Well, “we” most certainly did not include Dick Young, so in actuality what the client wanted to know was how he or she was doing. From day one, I had trouble with this often-asked question, because I was pretty certain the answer I would give would not feel right to me and, in the end, would not be especially helpful to my client. So I muddled along with mixed success.

Pre-Established Goals

Today, with the benefit of decades of hindsight, I have come to recognize that the clear winner would have been to simply decide with clients whether they were comfortable with the way we were meeting the pre-established goals we had worked out together. That meant no more comparing to one or more market indices or the efforts of other business associates. That sounds pretty simple in theory, but in actuality, a different picture emerges.

Buy High, Sell Low

The decided tendency of a vast majority of investors is to greatly understate sensitivity to risk. Most investors work off a “buy high, sell low,” emotionally charged template that is a bear to dismiss. The concept of patience is anathema to most. For many, action is the partner of success—when in fact history proves this not to be true. Sadly, the final nail in the coffin of goal construction is the total inability of most investors to embrace the two most important words in successful retirement account investing: compound interest.

OK then, a number of hurdles must be conquered before a suitable goal-oriented plan can be put in place. It is clear from my above menu that the subject of risk sensitivity must be addressed first, followed by some homework on portfolio activity, patience, and compound interest. Once satisfactory common ground is achieved, it is time to determine targeted returns.

The answer to the question “How are we doing?” is dependent on your performance relative to how you planned to do. Planning is the hardest part of investing. If you need help creating an investment plan for your portfolio, fill out the form below. You’ll be contacted by a seasoned professional from my family run investment counsel firm. They will guide you through a no obligation review of your portfolio, the first step in building an investment plan that is right for you. If you would like more information, visit www.younginvestments.com.

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