The following is from the middle of the book. He’d been shipwrecked for some time – ten years or so – living only on what he could salvage from the wreckage and that which he could find, make, grow, or kill.

“I had now brought my state of life to be much easier in itself than it was at first, and much easier to my mind as well as to my body. I frequently sat down to meat with thankfulness and admired the hand of God’s providence, which had thus spread my table in the wilderness. I learned to look more upon the bright side of my condition and less upon the dark side, and to consider what I enjoyed rather than what I wanted; and this gave me sometimes such secret comforts, that I cannot express them; and which I take notice of here, to put those discontented people in mind of it, who cannot enjoy comfortably what God has given them, because they see and covet something that He has not given them. All our discontents about what we want appeared to me to spring from the want of thankfulness for what we have.”

A great and simple recipe for a rich, contented life. To fight against anxiety and worry, there is no better remedy than this:

~ Recognize the hand of God’s providence

~ Give less consideration to what might be lacking

~ Approach the day with thankfulness for what I have

~ Take another step and begin to express thankfulness for what others have that I do not

May we all be so wealthy. Have a thankful week!

I fear it’s on the move again.

Working quietly, like a kind of virus, this enemy enters your portfolio and slowly takes over.  By the time an uneducated investor realizes there’s a problem, it’s almost always too late.  Before I tell you the name of this villain, let me tell you a sad story.

During the late 90’s, advisers like me who promoted the use of multiple asset classes (like large companies, small companies and value companies for example) took criticism for that position.  US large companies were having a very hot four-year run.  During those years, depending on your mutual fund, if you had owned all or mostly all US large companies, your portfolio would have more than doubled.

Our story begins late in 1992.  An investor invested $100,000 into five mutual funds.  These five mutual funds were chosen as a result of their differences.  He owned small companies, value companies, bonds, large companies and an international fund.  He purchased $20,000 of each.  He was diversified and he felt good about it.

By 1997, his total portfolio balance was $125,000, but only one of the funds did very well at all.  The large company fund was almost $45,000 and the other four had gone up and down but stayed roughly the same. All four totaled not much more than the $80,000 they started out at in 1992.  Depressing!

He decided to get involved. Every magazine cover he looked at in 1997 showed investment returns like the returns he was getting in his large-company fund.  Over and over this new knowledge was confirmed.  He started listening to himself. “I new I should have put more in that one fund in 1992” His sub-conscience was condemning him.  Why did he allow that investment adviser to talk him into those other funds?  After all, shouldn’t an adviser be able to predict the next hot fund or sector?  What was he paying him for anyway?

By now, nearly all of the media attention “news” on the investor shows was on large US companies and the funds that owned them. The investor made his first move based on his new knowledge. He sold the value company fund and moved it to another large US company stock fund.  Very quickly, he was rewarded for doing so.  It was only half way through 1997, and these two mutual funds were up even further; he now had $140,000 in his total portfolio.

This caused him to cash in the small company fund as well as the international fund, trading both in for more large US companies.  But remembering that diversification is important, he chose funds by the name “high tech” and “medical tech.” They were all US large companies, but the “focus” of the mutual fund manager, the expertise in business analysis, was different in each fund.  He still felt diversified.

By the summer of 1998 he was rewarded again.  Everything was up now.  Well . . .  everything except for his bond fund.  By now he had over $190,000 in his total portfolio.  He had almost doubled his money since 1995.  The bonds were around $22,500 while all of his other funds were over or nearing twice their original value.

He sold the bond fund mid-year 1999.

“All in” now, rounding 1999 and heading for 2000, he had a portfolio valued at nearly $210,000.  It was all in US large-company stock, but of varying market sectors.  He still felt diversified and had already done the math on his $210,000 fund.  It might as well have been 2005, and his fund might as well have been $420,000.  He was confident that this was in his future, doubling money every 5 or 6 years.  He would be a millionaire by the end of 2012, he figured.  “Maybe I should buy the cottage now while prices are still relatively low,” he mused.

During early 2000, you would not have been able to hear a pin drop if you were a super hero with super hearing. But hear it or not, there was a pin, and it popped the villain and took the air out of it in short order.

You see, the villain in this story was a slowly growing bubble.  First it was one fund out of the five, then two out of five.  Then three and four, and finally, all five of our investor’s funds were in five essentially identical mutual funds.  The silent killer was a portfolio bubble.

Though the mutual fund managers named their funds differently, they all owned essentially the same companies.  GE and IBM for example fit the descriptions for almost every category named by mutual funds.  Apple found its way into almost every fund as well.  With the typical mutual fund holding between 200 and 300 of the most popular companies in its class, US large company mutual funds became so closely identical by holdings that when one moved, they all moved – in lock step.

When things were good they all went up. And when things were bad . . . well . . .

POP!!!

By the end of 2000 his account balance was $150,000.  He was not sure where to go.  Hold on for a bit – markets rebound, he said.

He goes to his adviser for a pep talk.  The adviser assures him that market corrections are normal and that markets rebound – he should stay put.  Gut confirmed.  Stay put.

So he stays put – he stops opening the statements for a few rotations.  At the end of 2001 he opens his statement and finds what he feared – a balance of $110,000.  He is dangerously close to his 1992 balance.  And ten years later! How could this be?  He starts to sell the large-company funds one at a time.

He goes into small-company funds in 2002 – why not? These funds did very well in 2000 and 2001.  He feels smart and decides that next time he’ll see it coming a little farther ahead and make the move sooner.  But not to worry.  He still has his $100,000, plus a little bit . . . and now he knows better.

Or does he?

Tune in again for the rest of this story.

So where do I look for returns? The answer to this question is in the answer to an even better question:

Where do returns come from?

I look for returns where returns have been found. And because risk is absolutely required in order to gain a return that beats inflation, I only take risk where risk is known to have been rewarded.

Many will look to a new mutual-fund manager whose promises are based on demographic phenomena like the necessary rise in health care needs of boomers. Or they’ll seek out the “wisdom” of a group of investors touting the ability to know the connections within a complex global market.

Some will look to Gold, a commodity which has no ability to grow in intrinsic value and from which no real return can be expected.

Still others are so deep into the political news and steeped in that rhetoric, that they run to the latest fear monger with a website that is sure to SAVE the investor from certain doom that is looming – in the next 12 months!

The high-level category that surrounds all of these strategies is the category that believes in inefficient markets. Those who aspire to beat the market, predict the market, and time the market in commodities or securities are among those who believe that markets are not efficient. They believe they can beat the market.

But they can’t, not for long, anyway. For today, let’s simply start and end with the fact that no one has ever done it long enough for any investor to build a retirement portfolio and retire with it. Some have beaten the market for periods of a few years. But those who have done so have not repeated their performance.

There are only three factors that have been known to produce premium results for investors in the long run. Three areas where disciplined (steady, long term, non emotion driven) risk, taken prudently (diversified and rebalanced) WILL produce return that beats safe or guaranteed investments.

1. The market.

2. Small companies. The smaller the better.

3. Value companies

The model was discovered and built by EugeneFamaand is called the Three Factor Model. It works here in the US and abroad. We teach about this in our monthly workshops if you’re interested in hearing more. Or simply tune in here regularly.

For now, where should we look for something good?

Where we know good has been found.

Stop chasing the empty promises of those who want to be seen as gurus. It’s never been proven that the market can be beaten. Wise investors, small and large, accept this and accept the market’s tremendous return.

“Almost everyone who is in the pursuit of money is not honest about it.”

It was one of those times when you hear something and it goes right past the conscious mind and drops into the subconscious for a while, where it festers. This came out for me today when I realized I’d been thinking about that quote for a few days. And because it’s been a few days, I’m not sure exactly who said it. I’d love to give them credit. I think it was Rush Limbaugh.

Anyway, it’s been nagging me. “Always”, “Never”, “Everyone”, even “Almost Everyone” are the kinds of generalizations that are not helpful in arguments. We know we shouldn’t use these broad categories without really checking ourselves, because there are precious few statements of condition which are still true in very broad categories. What’s been nagging me is the thought that this might be one of those exceptions.

Checking Myself…
What am I pursuing? Am I pursuing wealth? Money? Even the “things” money can buy? We all do to a certain extent. Yet, are we completely honest about that? Here are the top ten things I want:

1. I want to glorify God in my life. He created me and my chief end is to glorify Him.
2. I want to love my wife and give myself up for her. My life for hers.
3. I want to love my kids, and train and prepare them well to have the same first two goals as I have; included in that is giving them an excellent education.
4. I want to serve and honor my extended family and friends. They are generous with me and I want to be generous with them.
5. I want to serve my clients well. Give them excellent, well-thought-out, and apt advice. I want to be worth more to them than they pay me.
6. I want to love my neighbor. Help others who are struggling and be kind even to those who don’t treat me well.
7. I want to be healthy and live as full a life as God allows me to by eating well and exercising regularly.
8. I want a vehicle with more than 11 seatbelts. You might want to call that a need, but so far we’re safe and legal.
9. I want a nice barn in my back yard.
10. I want to finish my basement sometime and maybe put in a pool.

When I don’t talk to myself, when I don’t remind myself what I really think, I can fall into the habit of HEARING myself. When I hear myself, the list is much less admirable:

1. I need a 2008 or newer, Ford 15 passenger van (really a hot car once you get past the size).
2. I want my kids to behave and smile most of the time.
3. I want to go out for dinner more and eat whatever I want.
4. I want my wife to be happy when I’m an hour late from work.
5. I want to have more fun and work less.
6. I want to go to MSU football and basketball games – maybe even get season tickets!
7. I want a new set of friends (that’s for you, Dave)
8. This list goes on and on.

I know that money is not the point. But it can easily become the point if I don’t continue to set my mind on the right desires and goals. On my best day, I’m there already and I want that first list. I don’t need to work hard talking myself into it.

But on most days—like today—I need help. I need to be reminded. So…thanks, Rush, or whoever you were, for the reminder: that when it comes to motives, I’m my own best talking head.

Milton Friedman agrees with me on this…

Dan Cuprill, a fellow Matson Money investment coach and all-around great guy, recently sent this message out to his clients. It’s a powerful reminder of why we’re doing what we’re doing. Look for the farmer/seed analogy—it’s really good…

Dear Friends,

As I write this, the Dow Jones is up over 12,100. After the news from Europe turned out to be not as dire as many thought (is it ever?), markets rebounded. Let’s look at what you did right during this time:

1. You re-balanced: Thanks to rebalancing that was completed at the start of the quarter, you were able to take advantage of this recent movement. Money moved from fixed income into equities, allowing us to buy low and maximize the benefit of volatility.

2. You didn’t try to time things: You didn’t worry about what was the right day to pull the trigger. You understood that markets move in a non-linear fashion. Over time, free markets have given us a great quality of life. While living through bad news is difficult, history has shown us time and again that it’s never permanent.

3. You didn’t obsess on short-term results: Farmers don’t dig up seeds after they plant them, and you don’t obsess over how your portfolio compares to another over a short period of time. You understand that a well-diversified, structured portfolio that eschews the evils of stock picking and market timing is your best weapon for achieving financial success.

4. You let me coach you. I’ve learned over the years that not all investors are coachable. Just like some athletes, I presume. When an investor is not coachable, I bring little value. Hence, I sever those relationships. I know that human emotions are a far greater obstacle to success than almost any portfolio. We are wired to avoid pain at all costs, even if some pain is necessary to achieve our long term objectives. As humans, we would love to get returns in a steady and linear fashion. Not possible. Life is not linear. My job is to remind you of this and keep you focused on the long-term likelihood.

5. You understood what long term means. Someone retiring today at age 65 has a strong chance of a 20-year retirement. If prices increase 4% per year, they will more than double during that time. Everyone needs to be a long-term investor.

As your coach, please accept my gratitude. I am fortunate to have such an incredible group of clients.

All the best,

Dan

I too am fortunate to be working with all of you. I hope this was helpful.

Evan

Hey Evan,

This is a great clip to share with investors and prospects!

Check out my recent appearance on Fox Business where the discussion surrounded the recent market volatility and what investors should be focused on right now. It’s times like these when investors and some advisors make the biggest mistakes with their portfolios by disregarding the basic rules of investing. When there is global volatility, there is global opportunity in the market. Make sure to get in the discussion and leave me a comment letting me know what you think.