http://www.lewrockwell.com/north/north683.html

The Paradox 1 is meant to present a concept, that risk actually go up over time if you are focused on $ and not %. It is backed up by data which I will add in a future post.

In terms of paradox 2, that is the point time weighted returns remove the impact of cash flows, but in real life we have cash flow in and out of our investments, often the timing of cash flows can result in a dramatically different return to you the investor. The true measurement of investor returns is dollar weighted which are more difficult to find.

I will provide some specific examples in the future.

Great question!

As for Wealth Management Paradox – Part 2, my retirement mutual fund provider calculates my personal rate of return (time-weighted). Yes, it is something any financial services provider should do for you automatically.

squished

No, really. As they say in driving safety, the most risky part of a car is the nut behind the wheel…

That said, you have to take the time and figure out how you want to invest. This isn’t a blanket ‘you should always buy ‘n’ hold’ statement either. First of all, find the investment strategy that suits your psychology. Obviously, buy and hold isn’t necessarily the best if people can’t stick with the hold part in a correction.

Maybe the majority of people shouldn’t be buying and holding stocks or stock funds if they have such a hard time sticking with the system when there are corrections… ?

According to the research that my company has done, despite the average return of the overall stock market being much higher, the average return for the stock market fund investor is just 3%.

It drives me crazy when I explain what’s going on and that if the client wants to go to cash now only to invest back into the SAME portfolio later “when the stock market is better” they are just making a decision to buy high and sell low. You have no idea how many times a day I hear “yeah, i know, I just can’t lose any more in this account.” The fact that it’s only a loss on paper and their is still 18 years before they are planning on beginning to withdraw the funds seems to not matter. Le sigh.

http://www.buffettsecrets.com/mr-market.htm

For instance, look at Ken Heebner’s CGM Focus Fund. As you can see here http://tinyurl.com/dmdpjo, the fund annualized 16.33% over the last 10 years. However, the average investor in the fund annualized -23.39% over the same period! (Yes, that is a negative number.)

Plain and simple, investors bought the fund after seeing good returns or reading about the fund in the press (bought high) and sold the fund after becoming disappointed over a short period of time (sold low).

I’m not at the point in my “baby steps” to start my investing, but this is definitely the stuff I need to know before I even wade into the water. As always JD, thanks for the information you send us.

Cheers,
Adam

http://empiricalfinanceresearch.blogspot.com/2009/01/sports-sentiment-and-stock-returns-510.html