Wall Street’s new lie to Main Street – Asset Allocation

The greatest lie ever told used to be Wall Street telling main street to “buy and hold”.  Of course thats what they told you every chance they got. It’s not what they did.  The holding period for stocks dropped from 8 years in 1960s to 2 years in the 1990s and 8 months in the 2000s.   Today, stocks are bought and sold in milliseconds.  Which is one of the big reasons you don’t hear much about buy and hold any more. That and the fact it didn’t work.  I think individual owners of stocks  finally came to understand that old saying “Fool me once, shame on you. Fool me for 50 years, shame on me. “

But Wall Street needs a marketing slogan doesn’t it ? How else are they going to get all the suckers back into the market ? (Great article on the Stock market is for Suckers from Macleans.ca). So what’s the new mantra that all those brokers, mutual funds and ETFs want you to buy in to ?

Asset Allocation (Aka diversification) is the best approach to investing.  Everyone is talking about asset allocation.  It’s not a surprise given all the new funds, REITs and ETFs that have popped up in the last couple years. The more diversification sold to individuals, the more money to buy them all.  Wall Street has to sell what it has doesn’t it   ? It’s just good business for them. But not for you.

No longer does Wall Street  even want you to consider buying what you know. Remember Peter Lynch describing how buyers of stocks should pay attention to what they see in the mall and elsewhere and use that as a source  of ideas and information ? Or Warren Buffet suggesting that we should actually invest in things we know and look for the value there ?  Well you can forget about that kind of investing.

Today, your investment advisors want you invest in things you have absolutely no fricking clue about and have pretty much absolutely no fricking ability to learn about.

They want you to diversify into Emerging Markets, Commodities, International Bonds, Munis, Real Estate Investment Trusts, ….and.. well, a lot of different “stuff”. Here is an excerpt from an article from a Sarasota  paper today:

“For context, I will provide the performance of my “moderate investor’s asset allocation” for both 2010 and with its predecessors for the period since 2000. For the previous 10 years, its predecessors were up about a cumulative 104 percent.

Last year’s version of the allocation was:

Fifteen percent in an S&P 500 index fund (IVV).

Five percent in a small-capitalization value fund (VBR).

Twenty percent in a diversified international stock fund (VEU).

Five percent in an emerging markets international fund (VWO).

Five percent in Real Estate Investment Trusts (VNQ).

Ten percent in large and mid-capitalization stocks with a history of paying competitive and increasing dividends (VIG).

Ten percent in a diversified portfolio of convertible securities (ACHIX).

Five percent in a U.S. Treasury inflation-indexed bonds and notes (VIPSX).

Fifteen percent in an international bond fund with traditional fixed coupon bonds (GIM).

Five percent in an international bond fund for inflation-indexed bonds (WIP).

Five percent in cash equivalents.”

 

That is a suggestion for a “moderate investor” . Let me translate this all for you. “I want you to invest 5pct in cash and the rest in 10 different funds about which you know absolutely nothing. I want you to make this investment knowing that even if there were 128 hours in a day and you had a year long vacation, you could not possibly begin to understand all of these products. In fact, I don’t understand them either, but because I know it sounds good and everyone is making the same kind of recommendations, we all can pretend we are smart and going to make a lot of money. Until we don’t

Asset allocation is about making you a sucker.  Do you seriously want to put a significant percentage of the money you will need for your future in funds that put your money into things you have absolutely no idea about? Will you have any clue about when to change your asset allocation ?  Will you change it based on changes in the dollar ? Changes in domestic inflation ? Changes in European inflation ? Inflation in China ? Changes in tax laws in Italy and Greece ? Changes in interest rates ? Trade balances ?

It comes down to this. Do you want to invest in something you know, or in something Wall Street wants you to believe ?

Do you really think your broker, his boss and the analysts at their firm really are being completely honest with you about how much they know about these investments they want you to make ?  Ask them if they are making the exact same investment with their money. Ask them if they would make the same investment if they were not allowed to look at a quote screen all day long like you aren’t able to – which tells you if they trust the investment or want to watch it second by second knowing they may have to pull the trigger and get out on a moments notice.

Ask your broker for the names of people they have had to call or get a call from and let them know that their investment has  been wiped out. Talk to those people to understand what the ramifications of making in an investment in something you know nothing about might be.

Don’t be a sucker. Remember this. It’s better to make less, or next to nothing than to lose everything. Don’t get greedy.  Don;t get desperate. The stock market can’t save your financial future, but it can end it .

http://blogmaverick.com/2010/08/20/the-stock-market-is-still-for-suckers-and-why-you-should-put-your-money-in-the-bank/

 

 

66 thoughts on “Wall Street’s new lie to Main Street – Asset Allocation

  1. Hey Mark great post! Myself,I won’t go anywhere near the stock market or even Treasuries or Bonds because our government’s can’t be trusted. I’m strictly in cash. No IRA’s or any BS like that.

    You should make money in a job or a business of your own.

    Comment by markgrove -

  2. We need to reinvent the capital structure mechanisms in this world. We should create viable local stock exchanges or funding mechanisms which issue shares for local businesses in close proximity to where we live. Too much of our money is going out to investments in multinationals in places we don’t even know about or understand. A much larger percentage of our dollars “stay” in the local economy when it is invested there AND with the inexorable rise in energy prices over the next few years, alot of money will be forced into investments on our shores anyway. Enough of the large corporate stranglehold on our wealth …

    Comment by 1jstr -

  3. Key global equity indexes have been overextended for too long, similar to 2007/2008.

    Despite any market intervention, natural market forces can not be stopped – only delayed.

    When the market reasserts control soon, the overdue correction may be extreme due to that delay.

    Be careful out there.

    Comment by Grand Supercycle -

  4. Pingback: Arguing with Mark Cuban on Asset Allocation « Portfolio Investing Blog: Portfolioist

  5. Bad news today: Coca Cola raised its dividend –again. …
    I got a 7% raise. Yeah, buy and hold is a bitch. That nasty stock market is horrible. … LOL. ..

    Comment by mrduke2 -

  6. OK, all you Cuban sycophants can pile on, give me the thumbs down, etc. Have at it. Here is my beef, Cubes. Pun intended. You sucked your fortune out of the domestic equity market, period. So to blast and dog the domestic equity market, and financial professionals in general, strikes me as hypocritical. I take it you weren’t out hammering funds, asset allocation strategies or buy and holders when they were sucking up your stock and stuffing your pockets full? No, I suspect not. So your ‘bury it in the back yard’, or ‘put in in the bank’ (albeit at 1/2% – talk about a sucker play…a guaranteed loser to inflation? Brilliant.) It just smacks of the old ‘I got mine, now I routinely take pot shots at those who got me there’, i.e., the capital markets and thousands of professionals who schlepped your stock. I’ve read your blog for several years and always appreciate you keeping it real, but don’t pee on my shoes and tell me it’s raining. Your diatribe on asset allocation if full of half truths. You’re usually better than that. And yes, in the interest of full and fair disclosure, I’m in the business. I fully support the system that made you rich. But lets tone down the rhetoric and remember you’re one in a ba-zillion. Some of the less gifted, acumen wise, listen to you and may well follow in your footsteps but can’t do the same DD. Private placements, for example. I don’t have data but I bet you a chunk 80% or more of them hit the wall. Just me more careful with your assumptions about your readership. They may be jumping off a cliff they can’t see the bottom of.

    Comment by enzoferarri -

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  10. Dear rdweaver20 and pfcheungs,
    I hope you both accept my apology regarding my comments on this blog. I too,get very defensive when insulted,and would like to set a few things strait.
    I dont know mc nor he I from a hole in the wall.I went to hear him and others discuss the future of media at a public event on Feb 3rd.At that time,my comment was STILL not posted on this site.If you scroll up,you will see that I requested he not post it the very next day.It was immediately “spammed” out seconds after I submitted it due to key word rejection anyway-and was not posted till some time recently.I thought it was never going to be posted due to my request.As you may know,if something is blocked and then posted days later,they will still list it chronologically,which is why I assume you didn’t address me on the 31st.Although I tried not to comment today, I did,and hope mc will delete all 3 of my comments.I’m curious if pfc was in fact “insulted”,and hope you will both accept my apologies on this blog publicly.This was the 1st(and last)time I ever read or commented on a blog,and only did so to get some insight on mc before I went to see him speak.WP will not let you delete your own comments,only the owner of the blog site can.Please respond.

    Comment by nedle -

  11. I find rd’s comment troubling when he states he “knew very little,if anything,about the company or their business” in regard to his recent “very nice profit”.
    We should all thank him for his honesty and insights, and hope he runs all his blog comments by his wirehouse’s compliance dept.

    No wonder we will probably lose a great American icon (NYSE) to the Europeans.

    I feel bad for many investors AND brokers(and he may be one of them)who got caught up in all the hype. Hard work requires more than trust and dreams.

    Comment by nedle -

  12. Inner Circle Ned:

    Verbal “rock and roll”…really?

    You have great respect for Vets, yet you insult PFC from that comment on. Your entire diatribe was one big run on sentence that only proved his point that MC needs a new inner circle. Lebron’s boys have a better understanding of true wealth management than you do.

    Today was my 2 year anniversary of moving from one wirehouse to another after 28 years. I had a little over 90% of my clients follow me. There were more than a few that I almost did not call. Unlike Ned, not all my stocks picks worked out as perfectly as Noble Drilling. I figured they would not come due to downright lousy performance in a few cases. In nearly all cases the clients said they moved their accounts because they trusted me. They knew that I had not intentionally underperformed and had never done anything deceptive. Most people do not want to manage their own finances and just want someone they can trust to help them achieve their goals.

    I also closed on a private equity investment today that netted a very nice profit. It was brought to me by a old fraternity brother whom I trusted. I knew very little ,if anything, about the company or their business. All I knew is that I trusted my buddies opinion and he in turn trusted the principals of the company. In this case, it was a bridge loan, so a verbal promise of repayment was all I needed (and a ton of legal documentation). Again, it all about trust. If you don’t understand all the pieces of Marks hypothetical portfolio, find someone you trust who does. Don’t dismiss asset allocation. It works…trust me.

    Comment by rdweaver20 -

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  16. Daytrading is the only way to go. Find a diversified list of quality stocks that channel, and day trade them. As time goes on, you add new ones, and dump the non-performers. It took me 3 months to learn the techniques, and 3 years to develop the discipline, but I have turned $8,000 into $12,000 in the last three months. You also need to be a member of a like-minded daytrading community (a support group). Wall Street hates DayTraders, but we really are the smart ones, IMHO. You CANNOT trust your investments to anyone except yourself. That’s the bottom line. You have to learn to listen to the ‘pundits’ and the ‘experts’ with a finely tuned BS filter. If someone like Goldman rates a stock as a ‘Buy’ on CNBC … that’s probably a good time to sell it if you have it ….

    Comment by iheartdaytrading -

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  18. Interesting Article Mark!

    Comment by stevenrecords -

  19. Perfect asset allocation results in a stagnant portfolio. All the assets that go up are balanced equally by the assets that go down. You’ve done a great job in allocation but a poor job in growing your portfolio.

    The key is to find some asset categories that are non-correlated for most of your portfolio so that you don’t get wiped out, can focus on a smaller group of assets, and then think and act on that smaller segment that you have experience with.

    I have experience in the industrial precious metals; I used to buy them for a global 50 manufacturing corporation; but I won’t buy gold as that is driven by other market forces. I buy stocks as I’ve started, owned, and run businesses and understand them. So my portfolio is a little un-balanced; but I ‘watch the basket’.

    Be cautious with the ‘Watch the basket’ advice, that really means that once you own a stock/fund/etc and it starts to go down you have taken emotion out of the decision of when to cut your losses. Can you handle 1% down? 5% down? 10% down? 50% down? What your reactions and actions are to ‘Watching’ will mean as much to your success as finding ‘a winner’… riding down a 50% loss takes that stock/fund 100% increase to get you back to flat ; and how many assets will do that consistently? So don’t just ‘Watch’ be active with it.

    And don’t diversify too much.

    Comment by jvin248 -

  20. No offense to Mr. Cuban but he received his advanced degrees in finance and financial planning from where?

    I think MC has missed the point of asset allocation which is diversification or the spreading of risk. He also uses an extreme example to make his point. Many of the securities (equity and bond) that Americans have put their money in over the last 20 years have changed in their mid to long term ability to make money. It’s very hard to apply the Lynch axiom to asset classes (REITs, Precious Metals, Emerging Markets, Commodities) that have outperformed the types of securities (Proctor and Gamble, Coke, Ford) described in Lynch’s books. Many Americans only know of these securities because they are (unfortunately) tied to our consumption based economy. People only know these products because they buy or use or work for the companies that sell them. Admittedly that’s a little harder to do with Foreign Debt. That doesn’t mean you give up and go back to bed. Not diversifying a portfolio is like owner a basketball team of forward guards because that’s all you know.

    While I agree that an investor shouldn’t blindly follow what their advisor/broker tells them, I do think they need to spend (some) amount of time learning about what they’re putting their money in. We’ve had a saying in the financial biz for a long time and I think MC’s comments exemplify this. That is… the average person invests more time planning a vacation (buying a car or whatever) then they do planning their retirement. It really doesn’t take a lot of extra time to read the WSJ or a couple books on the subject of asset classes. From there you find a reliable and trust worthy (fee based) advisor that either manages the portfolios themselves or hires a reasonably priced third party to manage it for you. Fee based advisors are a dime a dozen. If you don’t like yours find another. Go to http://www.fpanet.org/ to find one.

    Your mother used to tell you not to put all your eggs in one basket. That rule hasn’t changed for a couple hundred years. Asset allocation follows this simple concept. Your job is to make sure you don’t have too many baskets – or you hire someone to watch the baskets for. Someone that’s good at basket watching. Get my drift?

    Comment by docmartn -

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  26. Mark,
    Can you delete my comment made Jan 31 at 6:43 AM ?

    Thank You

    Comment by nedle -

  27. Great read. I understood exactly what you were tying to say. It seems more and more investment products are encased in subterfuge where to get to the root of how this is going to make you money you need to really look at it. It seems like it is easier today for me to make $ with an optionmonster account managing trends with no clue about what the business fundamentals, long term outlook, and R&D are of the companies who I trade. There are still worthy investments out there and some of them may be in the neighbor’s business and some may be in Wall Street. You just need to due your homework to select the best ones.

    Comment by jparxcd -

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  30. Great post PFC. It appears that MC has lost sight of his roots and feels a need to dump on hard working people like us, despite his complete lack of experience in the retail or HNW biz. I really irks me when people lump everyone in our industry as “wall street”. Are there problems with the “capital markets” side of a number of firms..yes, but he seems to be specifically targeting the wealth management side. If anything, we were the victim of the financial engineering of the past 10 years. A survey from a few years back revealed that over 60% of the public believed that it was better to own bonds when rates were rising than when they were falling. If that does not illustrate the need for honest experienced advisors, I do not know what would (Its the opposite by the way).

    My last post was deleted. I guess Mark does not like to be called out. Well, I for one am calling BS.

    Comment by rdweaver20 -

  31. To pfcheungs…I agree with many of your comments,especially the next to last para. and the very last sentence,BUT allow me to give you and Mark my “spin”, if I may…
    First, I want to thank you for your service(yeah I know its the pop. thing to do nowadays,but I’ve always had great respect for vets). Having said that-get ready for a little financial verbal “rock and roll”
    For those readers that don’t know,a buldge bracket is the GROUP of lead UNDERWRITERS who usually make money by selling new and secondary offerings at a higher price than what they paid for them (earning what is known as the spread). My guess would be that the advice from an FA who works for such a firm, would be biased to recommend that firms underwritings. Nothing wrong with that,but that should be disclosed to the investor. Some FA’s earn a fee AND a commission. Nothing wrong with that either – but take this advice- before you haven’t a clue as to how much you are really making/losing/paying for ANY type account,(due to confusing statements)simply LIST every dime you send to that account. Write the date next to the amount,and at the end of the year add that up. AFTER all fees and/or commissions are deducted,check the balance in that account and compare it to your list total.You may be shocked with your returns after several years.
    My first Reg. Rep. position was with a Wall Street investment bank back in 1995.(no quotation marks around “wall street”- the office was located at 110 Wall St.)All my advice from then till now is well documented. My boss told me to pick just about any stock and SELL it. I did my “due diligence” and came up with Noble Drilling (NE)which at the time was offered at $5 a share.
    Everyone laughed at me…oil was cheap then…and I couldn’t sell anyone my story. The “street” was “bashing” oil at the time because it wasn’t “working”.
    (For the record I am not a contrarian investor)I thought the fundamentals as well as the technicals were excellent. I don’t think I have to tell you how well that stock performed since then.(so much for the “street’s” expert opinions) Honestly,I thought it was topping out long before its highs and would have acted accordingly. It skyrocketed and split for those of you readers that don’t know. I don’t follow it any more and have no opinion on it.
    I think an important point you did not make in regards to your compensation, is that if your recommendations are bogus and your clients assets tank- you STILL GET PAID that percentage of whatever assets are left- which I’m willing to bet is at least two percent annually since you work on the “street”.(I don’t have to put quotation marks around all the lingo and buzz words anymore…do I ?)
    I don’t care who developed asset allocation – I take the phrase literally. Back in 1998-1999, I told everyone I knew to get out of the stock market and invest in treasuries,cash(money markets),GIC’s(guaranteed investment contracts),bank qualified CMO’s(not all the trash that tanked the mortgage market) and a smaller allocation in a few closed end funds.(lets not forget I can validate this). That was MY asset allocation recommendation-which did/does not fall whithin ANYONES definition.Only a good friend/client/accredited investor took my advice and invested a very large amount accordingly. Again,everyone laughed and said- “Why would I want to make a measly five to twelve percent on that stuff-when I can make twenty to thirty plus percent in the stock market?… What the ****’s a “gic” anyway?
    Back then, you could have paid a small premium, or even purchased at discount(odd lots or small blocks)these bonds,notes,etc.and STILL be receiving low risk/relatively high interest that has been compounding for over a decade- whereas,if you check the S&P 500 charts- you will see that at the end of 2010, the market was at almost exactly where it was at the end of 1998!
    Back then, wall street’s key phrases were- “invest for the long term” and “new paradigm”……. oh please…

    Cash and Futures S&P Index Options are the tail that wags the dog in the stock market now a days…just look where the majority open interest and volume lies…and realize that large baskets trade accordingly…adjusted by fundamental news and oscillators on a daily basis.It’s all about hedging and risk arbitrage when it comes to the major averages,and except for some rare instances of profit taking by the big boys,the s&p will tick up for every downtick of the U.S. dollar- and vice versa.If you don’t believe me, just stick a real-time futures one minute U.S. dollar chart right next to a real time one minute futures e-mini s&p 500 chart,and see how the DX leads.
    Hey Mark…. re-schedule this thurs nite(Feb 3)…will ya…were gonna be diggin out of two feet of snow… Ned 978-790-4075

    Comment by nedle09atgmailcom -

  32. The majority of the comments here and the bulk of MC’s article exhibit an ignorance of how asset allocation works and the recent trend of vilifying “wall street”.

    To be clear, I work on “wall street” for a bulge bracket bank as a financial advisor in our private bank.

    Asset allocation is a technique that diversifies company specific risk and is the basis for reducing risk (volatility as measured by standard deviation). Asset allocation also is the foundation for modern portfolio theory. Asset allocation was developed in academia in universities, not by wall street to pitch product.

    My fundamental job is to educate my clients and help their investments grow according to their risk profile. It is insulting to imply that I want my clients to invest in things I will not educate them on. Furthermore, we are compensated by a % of assets under management. This means the only way I get bigger pay check is to grow my clients assets, further aligning my interests with my clients. If their assets decline, I make less money, and if I lose it all, I lose my entire paycheck.

    It is also insulting to imply that I am deceiving my clients. Our clients are all HNW individuals. I myself am a HNW individual and I make the exact same investments as my clients. I am regulated by the SEC, FINRA, and by other monitoring systems in place within my bank. I have a MBA from #1 business school in the world. Before working for a “wall street,” I served my country for 7 years and now as a financial advisor I help individuals and families achieve their dreams and goals through financial instruments. Asset allocation is not “good business” and I am not looking for “suckers”

    MC – you talk about making private investments in a previous article. Being a UHNW, this may be a viable option, but for 99.99% of the country, they don’t have access to private placements.

    We met at Marquee in Las Vegas during CES. If you recall, both myself and my friend (Hedge Fund Guy) were courteous enough to pay for your bottles. I gave you my business card and assumed that your family office/investment consultants had you well covered. From your article, it is apparent that they are all probably “yes” men and if I were you, I would definitely reevaluate who is in your inner circle.

    Comment by pfcheungs -

  33. Look, what Mark says makes sense. Still, I do remember him saying last August that “stock market is for suckers”, which made sense too. Checking the rear mirror, I see that if speculators among us listened to Mark (btw, I’m not one of them) they’d lose 1500+ points upswing of the Dow.

    Maybe the way to square what Mark says and what TRULY makes sense is to listen to Nassim Taleb (the Black Swan’s author)? He advises people to put most money into absolutely safe instruments (like gold equivalents – not gold itself,) while putting maybe 15% in the risky investments with the highest potential upswing, but do that only if those risky schemes MAKE SENSE TO YOU? Eh?

    Or, if you an entrepreneur, why not do the opposite – put 85% of all you’ve got into the venture you believe in, while keeping 15% for food and shelter, should you fail?

    What do you think?

    andy@peheaven.com

    Comment by anvoro -

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    Comment by fakeworkstudy -

  35. I agree with you. Wall Street is buy short term and not hold over a long period of time. The funds they sell you are a bunch of lies. The so called past performance is not what will happen in the future and can easily be all lies. Don’t Trust them.
    I still think I can make money in the markets by short term trading.

    Comment by whitewoody -

  36. There is a proverb in Germany: „the life is like a play which win one, the others lose.“ But in the Wall Street wins always only one.: the insiders who already know the stock market movements, before the others can react generally. And this is on all stock market places of the world in such a way, no matter whether in the Wall Street, in London, Frankfurt or Tokyo.

    Comment by schuellsteuer -

  37. I couldn’t agree more with you. I fell for this mistake for many years. To a certain extent I am still stuck in it more than I’d like. I’ve really come to think that it is equal parts marketing and bullshit. The whole point is so that you “need” them, because they make it so much more confusing than it needs to be. It also reduces their liability both directly and indirectly. It actually makes me angry. I don’t know what the best approach is. But I am more comfortable investing in people I know with small businesses and stocks I know and understand, which aren’t many. If you want to invest in the entire S&P, it’s easy to do, and you don’t need a broker or their fees or “advice”.

    Comment by ksr22 -

  38. I agree with MC and Jesse. Asset allocation works, until it doesn’t (see 2008). It also doesn’t make sense. If you wanted to invest in real estate, would you buy a house in each state of the country? Or would you do your research and find a special situation that can make the most money?

    All my firm does is research on individual companies and invest in them when appropriate using a conservative, value-oriented approach.

    The vast majority of my liquid assets are invested alongside my clients.

    WWykle is right, too. You can’t know every sector. But you can know enough about a lot of them to put together a diversified portfolio of researched investments.

    It isn’t rocket science, it just takes time, judgement and hard work. So long as you can do ok in the good markets and avoid much of the bad times, it can be a recipe for #1 beating the market over time and #2 sleeping well at night.

    Comment by chuckgoldblum -

  39. Supperrrr haberler

    Comment by corsario1 -

  40. It would seem that you deleted my comment…. I guess that means I’ll have to complete a full blown blog entry in order to do so.

    You have been warned. :0)

    PS, if you’re in the LA area Sunday night, feel free to stop by the Media City Church. Hope to see you there….

    Comment by Matches Malone -

  41. I agree 100% with MC. But I think the advice is only super-apt for those as smart and resourceful as MC. There is a large segment of the population, that if limited only to investments they were experts on, would not have anything to invest in.

    The AA guys are pushing diversification, which is a good idea, but using to push bad products.

    Comment by fearsomefinance -

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  43. Basketball, football, Wall Street (brokers / advisors) there are commanalities. Very few are willing to put in the work to be all stars. Having worked at the very highest levels of Private Wealth Management, the majority of the advice given is very poor and driven by incentives that are not aligned with clients.

    Comment by jessebelville1 -

  44. I was fortunate enough to have known Mark Cuban in college when he was not wealthy, studying accounting at Indiana University, and playing Rugby. Our first inclination he had an entrepreneurial mind was when he went in with a few friends and reopened a closed nightclub called Backstreets during his junior or senior year. What I gained from this story was Mark saying to trust your own judgement. He has.

    Mark and I were in the scrum together. That’s like linemen on a football team. We had to be able to play prop, lock, wing forward or eightman. In that scrum, one had to trust themselves and their teammate. That is what I see Mark saying here, trust yourself and/or your spouse, and your dreams. Those are the best investments that fill your head with great memories.

    Comment by steelguy425 -

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  46. cloudcto >– i think you might have misunderstood, or i’m just bad at saying what i mean.. my boss told me to put all my money into my *own* (not his) side company so that i would have 100% control over its growth potential. i consider enron stock options to be the same as the stock market. something i cant control.

    Comment by chris1999tx2 -

  47. Those 11 diversified categories listed are pretty easy to understand. Just by reading a couple of books on investment diversification will give you the answers. Wall Street tries to make investing hard/complicated, but in reality is is not. I have been investing in stocks for decades. I have made lots of money. Some stocks I have held for over 30 years now. My cost basis is super low. One example: bought Coca-Cola in 1981 for a split adjusted price of $1.53 per share. Now stock is at $63.00 and the dividend, which rises every year I have owned it, is $1.76 per share. That is a yield of 115% on my original investment not including the appreciation of the stock. What have I learned in the last 3 decades? Patience, common sense, and to ignore the noise associated with the daily ups and downs of the stock market. I will continue this strategy for the rest of my life.

    Comment by mrduke2 -

  48. I can only hope Mark buys the Dallas COWBOYS, Jerry Jones is such a loser (literally) and Mark could make the “BOYS” winners.

    Comment by judgebill -

  49. MC knows, as any risk taking entrepeneur knows and has a gut instinct about, that anything you invest in must be something in which you 100% truly believe in. Look at it this way: You have 10 ideas for new startups – restaurants, websites, media purchasing, etc. Pick that one idea, the one you truly 100% believe in and funnel all of your cash that way. If you can’t put your own money up for the initial investment, why should others? That’s what I look for when I buy stocks, REITs, etc. Are the top employees also buying into the stock. Example: Enron’s top execs cashed out right before doomsday.

    Last year I was approached by a Canadian man that invented an automatic golf-ball tee for driving ranges and home kits. To quickly illustrate – a person at a driving range would dump his bucket of balls into a dispenser at his driving mat, you would touch your club to a lever (not having to bend over and lose consistency, a key in a golf swing) and a ball would be perfectly placed on the tee. I was already equipped for advertising and distribution channels so I was eager for our teleconference.

    The inventor wanted me to purchase the “startup kit” from him for around $1000. Small investment package to encourage golf courses and driving ranges to order the product. I was going to sell in South Carolina, incredible golf market. I thought of only one problem with this $1000. If this was my product, I would give it to people at no charge on a 90-120-180 day basis because I believe that much in it. After discussing this point with the inventor, he was clearly upset, called me a fraud, and spewed enormous amounts of foul language through Skype. I knew I had made the right decision not to move forward. If the inventor of a product doesn’t have the balls to show his confidence about it, that should be a clear sign not too either.

    Long story, but this can be applied to any type of investment. Make sure the creator stands behind what he sells, or what he wants to sell.

    Comment by lejae08 -

  50. chris1999tx2 – Lots of Enron employees put their investments into their business and it didn’t work out too well for them.
    It’s certainly possible to get a better return investing in a business vs. the market. But that’s because you are taking on much greater risk. The failure rate of businesses is high. I’m not trying to discourage you from following a dream. Just understand the risks before you put all your eggs in the proverbial basket.

    Comment by cloudcto -

  51. my boss told me not to invest in the stock market, but to put that money into my own business as it was something i could control, and something that could make me more, per year, than the stock market ever could.

    Comment by chris1999tx2 -

  52. MC – I’ve always thought highly of you, $$$ guy, Basketball club owner, DWTS Dude, and BCS hater that you are. I’ve actually turned four of my friends onto your blog (and my son too!)

    So, instead of putting my ~$800.00/month and my wife putting in her ~$600.00/month to the 401-Ks that our company’s match 100% of the first 6% on – what if we gave it to you to invest for our nestegg. What could/would you do for us?

    Benn Dunn

    Comment by benndunnit -

  53. A typical 60/40 stock-bond portfolio following a buy, hold, and rebalance passive investment strategy over the past decade would have returned over 6% annually. Not great by historical standards but probably a better return than that achieved by the vast majority of investors. Based on historical back testing your argument that buy and hold doesn’t work is curious. And it begs the question, doesn’t work compared to what? Forex trading? Market timing? Commodity speculation? Holding cash? Tell us the winning strategy that beats the market. Is your new motto: “No risk all reward”?

    Comment by cloudcto -

  54. Ok Mark – on one hand, you say asset allocation is for suckers. On the other hand, you say not to get greedy. Are you saying we should all sit in cash until the right opportunity, or two, comes along? And then put, what, 30% of our portfolio in that opportunity? 50%? 80%?

    True asset allocation is not greedy, and is not desperate. A good financial advisor will educate his clients more than anything else. Diversification, when handled appropriately, is more productive and less risky than this quasi-“Rich Dad, Poor Dad” mentality, a majority of the time. Are there exceptions? Of course. But generally speaking, it will be a small percentage of people that will make more money in the long run by not diversifying and not using asset allocation.

    In addition to that, on a slightly separate note, talk to the SEC and FINRA before you attack the financial advisors of the world that tout asset allocation. Try putting together a portfolio that’s not diversified and that doesn’t use asset allocation – no matter how much you educate the client – and the regulators will eat you for lunch.

    Comment by jnt -

  55. This is all incredibly depressing for your average spare IRA contributor. That’s pretty much been the state of things for awhile.
    I realize that my Chuck Schwab rep is just hoping that I’ll continue investing so it will add cash flow to their company. I’m guessing that’s how these brokerages survive.

    I’d love to do some angel investing for better returns. Returns might be a lot better but riskier.

    Comment by gunnertec -

  56. Wall Street’s transaction-oriented structure promotes increased activity to generate fees and commissions. Warren appropriately said;

    “Long ago, Sir Isaac Newton gave us three laws of motion, which were the work of genius. But Sir Isaac’s talents didn’t extend to investing: He lost a bundle in the South Sea Bubble, explaining later, ‘I can calculate the movement of the stars, but not the madness of men.’ If he had not been traumatized by this loss, Sir Isaac might well have gone on to discover the fourth law of motion: For investors as a whole, returns decrease as motion increases.”

    http://money.cnn.com/2006/03/05/news/newsmakers/buffett_fortune/index.htm

    Comment by accrualworld87 -

  57. The short answer is, Wall Street just wants to print up gaming tickets, hedging their bets on both sides, and then take a cut from each and every transaction above and beyond their own investment profits.

    Comment by alexlogic -

  58. wwykle, I think your observations obfuscate finding a solution for main street. Explaining to us that the internet is the great equalizer does not address Mark’s main point, that Wall Street, as time goes on, holds onto their stocks for shorter and shorter durations of time.

    Investing has become rough and tumble gambling. Surely you are aware of mortgage securitizations, and the fraud they produced that is still in discovery phase.

    Even successful stocks like Apple make less sense nowadays. Why am I buying Apple? I get nothing for it. I don’t get a dividend. If a company as rich as Apple can’t afford to give out a dividend, why am I buying their stock? Because I’m gambling that others will continue to want Apple and the price will continue to go up.

    But Apple Stock will probably not go up forever. Therefore, Apple becomes a gambling stock and people are not in it forever, or not even necessarily for the long long term, because Apple does not give the investor anything unless the investor sells.

    If I can find pause to not invest in a successful company such as Apple, what about the more mysterious investment opportunities?

    Instead of diversifying one’s portfolio, why not break up the stock market into specific regions of investment. Medical equipment could be its own stock market, alternative energy another, shipping, food, clothing, feature films, and so on.

    about 3, 3 1/2 years ago, I recall reading investment advisors poo poohing hardware based companies (such as netgear), while being up on software based companies.

    The reality is both are needed, but the internet and digital technology has accelerated wall street’s penchant for securitizations based on ANYTHING that can be sliced and diced, and, THE ANTI-ANYTHING, anything that was sliced and diced and lost money.

    Comment by alexlogic -

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  60. the game is international. that should have been the lesson of 2008. sure, cash is king, but what’s cash? dollars? euros? yen? pounds?

    so long as debt levels remain obscenely high, cash = gold.

    gold’s been falling of late. a fantastic opportunity to buy the dip.

    the idea of cash is also in the process of being re-invented. a new global monetary agreement is needed, as china, russia, and others have been calling for. in times of transition, gold is where it’s at.

    of course, most won’t believe this. at least not until gold reaches its top. then it will be time to sell. :)

    Comment by kidmercury -

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  62. Mark-

    Do you suggest to stop funding Roth IRAs and 401Ks? Notwithstanding the tax benefits in these investments, the money is placed in funds which are tied to the stock market.

    Thanks.

    Nathan

    Comment by ndesa -

  63. Great read Mark, I know many people who lost everything in the dot.com bust by not diversifying and investing where they work too much. I truly believe that to be a wise investor it is wise not to invest too much, but to follow the KISS (keep it simple stupid) approach. In today’s world, that still works out best by working in Mutual funds IMHO that staff hundreds of people to do this research for you and leave these investment experts alone. I mean come on, commodities? Really, pork bellies and beans? I am sure they are talking more about precious metals, because everyone gets on the bandwagon long after the ride is over (Gold). Again, focus your research on which mutual fund matches your needs versus trying to read the tea leaves that these people are selling.

    as for buying software stock, that is pretty risky as the market is over-saturated and typically once someone is a competitor, they get bought or they get targeted for destruction. I worked too long at MSFT to not know that one.

    Comment by hudacity -

  64. Asset allocation is a very good thing if you take the time to understand what you’re investing in. And yes, it takes a considerable amount of time and research and hard work to get a grip on all of the investment products out there today. Then again, if you’re trying to get rich fast without doing any work, you should probably be buying lotto tickets from 7-11 and not mutual funds from T. Rowe Price.

    Most interesting to me is that Mr. Cuban, founder of HDNet, completely ignores technology in this post. It is because of technology that holding periods have declined so precipitously over the last several decades. For one thing, technology makes the world move faster, so conditions change faster, and changing conditions are what trigger buy and sell decisions. In addition, technology allows more people more access to more information. Thirty years ago, someone outside of Wall Street had no chance and seeing brokerage reports or reading earnings call transcripts in real time. Now this is common, and there are more financial blogs out there than anyone could ever care to read.

    Another note on technology and the Peter Lynch principle. Lynch’s “buy what you know” philosophy sounds great on paper, but when you think about, it actually discourages diversification. How many people out there really know the retail industry AND technology companies AND energy companies AND mining companies AND financial companies, etc., etc. You might shop at Gap, but that’s no reason to buy the stock. At the same time, you might not know much about technology besides sending an email, but if you didn’t have exposure to technology names like MSFT, CSCO, CRM, etc., in the last 20 years, then you were putting yourself at a real disadvantage. As an example, I have a blackberry and I don’t really have many apps, but I know enough to know that apps are currently riding a huge growth wave. So I own stock in MGIC because they’re positioned to benefit from the increased demand for apps and their track record of revenue and earnings growth reflects that.

    Comment by wwykle -

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  66. The premise of the article itself is much better than the title alone. If you read Cuban’s words, I don’t think he’s against asset allocation per se. He’s railing against blindly following Wall Street advice to diversify into a collection of confusing products. It’s the buying of unknown products that seems to be his biggest issue. I’ll agree that using asset allocation as a catchphrase to sell crap products is a problem, but properly used and properly understood, asset allocation isn’t as bad as Cuban makes it out to be.

    One other thing I found funny (interesting?) was that Cuban used Buffett as an example for buying only what you can understand. But a couple paragraphs earlier did Cuban forget Buffett when he ripped on buy and hold? It is well documented – ask Buffett what his favorite holding period is and he will say “forever.”

    Comment by michmikem -

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