Track Record Investing-Does It Work?

The last way you know you're gambling and speculating with your money is track record investing. Track record investing entails going with the manager, much NFL teams drafting players that had stellar performance in college. The manager might have 5, 10, 15, or 20 years of beating the market and you're hoping that he'll continue to do that into the future. An article in the Wall Street Journal pointed pointed ou the prediction difficultis inherent in using popular mutual fund rating and evaluation systems. namely Morningstar(TM), Standard & Poors(TM), and Value Line(TM). These evaluation systems are very good about identifying mutual funds that performed well historically, but have been mostly unreliable when used in an attempt to predict the outcome of a mutual fund in the future on prospective basis. The vast preponderance of evidence shows that you might get lucky and beat the market, but academic studies prove that most likely you would achieve less than a simple market return. All three types of specualtion, stock picking, market timing or track record investing, entail a forecast. Someone is trying to forecast and predict what will happen in the future. Whether you yourself are doing it or you've paid someone else to do it doesn't really matter, because in my view it is still speculating and gambling with your money. What a fun job for money managers - they get to gamble with your money, and they get paid big bucks for doing it.

Trying To Time The Market!

When assets are moved in the portfolio, based on a forecast or predicition about the future, this is market timing. For example, you've become convinced by economic forecasts that the market is heading down over the next twelve months. You decide to sell your stocks and put all of the money into cash. That is market timing! Market movements are random. No one knows what the market will do tomorrow or over the next twelve months. It bears saying again: Nobody knows with any degree of certainty what the future will bring and if they did they wouldn't tell you. Let's look at another example. Because of a war, you or your stockbroker predict that international stocks are going to lose big, so you move all of your stocks into the United States. Once again, this is market timing. This doesn't "feel" like speculating. It often feels like wise stewardship of your assets. If over the last two years, you have watched your portfolio take large losses in any one asset category, and every news program, investing magazine and stockbroker says this is the time to get out - it feels like prudent investing. Nothing could be further from the truth. In many cases, if not most, staying disciplined and staying the course is the best thing to do. That assumes that you currently have a prudent mix of assets. This is a huge assumption, because most people don't.

Trying To Pick The Best Stocks

The first of three types of gambling and speculating with your investment capital that you must guard against is "Trying to pick the best stocks." What's the next hot stock or group of stocks going to be? This includes stock-picking or even buying a seemingly diversified group of 100 or fewer stocks and holding them for several years. If you hire a manager who tells you what the best stocks are, such as a mutual fund, the manager often practices stock picking. In this instance the average turnover, selling a stock and then buying a new one, in American mutual funds is 100% per year. That means they are selling everything, wiping it all out, and buying all new stocks once every year. That happens year after year, after year, and they are doing it with your money, without your knowledge. Next message will deal with the second type of gambling and speculating with your investment capital.

Are You Gambling With Your Investment Money?

I'm not saying gambling is necessarily bad. If you enjoy going to the casino and taking some disposable income, or buying a lottery ticket, and it is money you can afford to lose, go right ahead. Where I have a problem is when people gamble and speculate with the financial wealth that they need for their retirement or their childs' college and their futures. Simply said, Don't gamble away your investment capital. Not all investing is gambling because the brokerage community, news programs, mutual funds and magazines all blue the lines that separate speciulating, gambling and investing, most individuals are specualting and gambling with their money and they don't even know it. They actually mistake gambling and speculating for prudent investing. How does this happen? It happens because the media and the financial community have formed an "unholy alliance." When you turn on a news program and see "experts" and analysts talking about their forecasts for the future,or what stocks they like; They actually tell what to buy, what to sell, what to hold and so on. The media needs these types of recommendations because that's what gets people to tune in. They need continual forecasts and predictions about the future to keep people watching. They need highly speculative, adrenalin-driven reports to keep people watching and keep the advertisers happy. Who are the advertisers on these pseudo news-investing programs? Many times, they are the very same companies that provide the experts to begin with. Every day investors make imprudent risks with their investment capital. In future messages I will reveal the three types of specualting and gambling with your investment capital that you must guard against.