Wall Street’s New Lie to Main Street – Asset Allocation/Diversification

Another re-post that I thought was timely:

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

 

Jan 24th 2011 4:18PM

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/

 

 

60 thoughts on “Wall Street’s New Lie to Main Street – Asset Allocation/Diversification

  1. (No, I don’t want his money! But I am sure somebody does, just like they want yours Taylor for the DVD “strategies.” Good blog!!)

    Comment by mrubinson -

  2. Taylor –

    He was referring to investing in general, rather than options. Options are a completely different game that for most “investors” borders on gambling. For the others who may know what they are doing, there is always the probability of being wiped out. I have studied derivatives, built models based on it and still, will not touch it except for hedging.

    I am not sure who will try to get you to invest in options. There are commercials to buy DVDs, but if anyone has a good strategy would they put it on a DVD or would they rather spend the time making money? This applies to anything. Look at these gold commercials, or the hottest mutual funds. If you have a fund company with many funds, every year there should be a few that beat their peers, and that is worth advertising. The next year there is another fund and so on. If you have money, which apparently the blog’s author does (I haven’t really heard of him before WSJ), somebody wants it. It is that simple.

    Comment by mrubinson -

  3. I am 22 and just starting to look at options for investing. I have been so refreshed to read about your outloook on the stock market because as a young person who has no experience in the market the idea of investing my money in something that I don’t understand and have no chance to learn about has always seemed insane. Thanks for the great advice.

    Comment by Taylor McArthur -

  4. Like I said before, that is brilliant.

    Buy Zynga Poker Chips http://www.socialplayful.com

    Comment by matrak104 -

  5. P.S. I couldn’t find the article on their website, http://money.cnn.com/

    I am not familiar with this magazine/website but assume it may be available online in the future so that it does not cannibalize newsstand sales.

    Comment by mrubinson -

  6. Touching on my initial comment re buy-hold investors selling on panics, Money Magazine has an interesting article in the September issue, page 102. It is related to behavioral economics… understanding market psychology is as important as being able analyze companies.

    Somehow my subscription switched to Money after U.S. News & World Report became online-only. Most of their articles are standard fare.

    Anyway, In an interview with economist George Loewenstein, article titled “Your Emotions Can Cost You Money,” one of the questions by Money/David Futrelle:

    Q: How would my inability to imagine how my future self will feel mess up my financial planning?

    A: [...] When markets are calm, investors think they’ll stand pat when the markets begin gyrating. But at the moment of truth, many end up bailing out, often at the worst moment.

    Comment by mrubinson -

  7. You’re right Mark, if your a day trader. But the average investor knows nothing about the market. That’s why they need to find an honest, smart financial advisor who knows how to diversify their money. And stocks aren’t always good to invest in.

    Comment by streets123 -

  8. Mark: If someone has a million dollars or more—-are you advising that they just put the money in the bank? Safety is great, but realistically, if someone has a nice amount of money, say by inheritence—-but not a large income, what should they do to grow the money? Leaving it in a savings account in today’s world, inflation will outpace interest. It seems as though some conservative stocks give reasonable stability with a bigger potential upside than the bank.

    Comment by dcangelo -

  9. Pingback: A Five-Step Checklist for Turbulent Markets | 360 Value Investing

  10. bgmorgan,

    “The reason why I “conveniently ignored” the Nasdaq and Nikkei is I’ve covered both types of situations in previous posts and I figured diversification would have clicked in for you by now.”

    A friendly tip: obnoxiousness and condescension aren’t winning conversation or debating tacks. Since you continue to ignore market risk, and refuse to acknowledge that diversification isn’t a protection against it, it’s pointless for me to continue corresponding with you here.

    I would suggest others who are interested in this topic do more reading on it. A good starting point would be some of the other posts our host has written on investing. Since you seem to have elided the point of his anecdote about his Broadcast.com roadshow (hint: the point wasn’t about diversification), you may want to read some of Mark’s archived posts too.

    Comment by davidpinsen -

  11. From my understanding, Mark’s point is that if you have extra cash, instead of investing it in the markets spend some of it on sale items (for future use), on cheaper car (save on gas), and other strategies then park the rest in cash.

    When you diversify into the different funds, especially ETFs, you really do not know what you are buying. When you don’t know, it leaves money on the table for the Street. Today, diversification is all the range. If for the next decade managed funds make more money/don’t lose as much, managed funds will be all the rage. Whatever sells.

    The third point is, there are many factors at play but does person really know where gold will be, where dollar will be, where a foreign region is going to be relative to the home country?

    I would have to disagree on avoiding investments, but understand he is referring to most people, and that part I would agree with. Thing is, it is possible to make money buying individual stock by reading SEC filings, news magazines, leg work etc. If you can’t do, find a manager that will do it for you. This is not the “I have an Iphone and like Apple’s products therefore I would buy AAPL.” If you compare AAPL to other companies, is it really a good value? If AAPL misses a quarter or one of their products flops, do you believe it will stay at these elevated levels? Is it worth the risk relative to other, preferably value plays?

    There are companies trading below intrinsic values. Some years, like in 2008-09, you have more; some years you have less. Nothing sexy but if you give it a few years, they are bound to come back in favor. If you have a few such companies, in different industries, that is diversification worth considering. And keep some powder dry because you never know. Every sector, industry, country has its bubbles. Read “Devil Take the Hindmost,” a great book about financial speculation. Keep it dry so you are around to play the next rounds.

    Peace.

    Comment by mrubinson -

  12. “The point of diversification is to NOT be too leveraged in any sector, especially any stock. Sure Citi shit the bed but no one stock should be a major part of your portfolio. There are plenty of examples of losers throughout the last 20 years but there are just as many if not more examples of winners and even if it was 50/50, you still made money if you were getting dividends and they were re-invested.”

    “I see you’ve conveniently ignored my examples of the Nasdaq in 2000 and the Nikkei in 1989.”

    Davidpinsen,

    I really feel bad for you. Good luck with your website.

    The reason why I “conveniently ignored” the Nasdaq and Nikkei is I’ve covered both types of situations in previous posts and I figured diversification would have clicked in for you by now.

    The Nasdaq is made up of mostly what type of stocks? Technology and internet companies.

    In my first post I said:

    “You diversify to avoid risk because usually when one company within a sector loses money, the others do. (financials, tech stocks in the early 00s are the best example)”

    So if you were heavy in Nasdaq, your portfolio shit the bed because the index is leveraged in Tech stocks. Hence why it’s good to never be leveraged in one sector like Financials right now. There are a lot more sectors in the industry than Technology and Nasdaq only covers equities.

    The Nikkei is made up of what type of stocks? Japanese.

    In one of my later posts I said:

    “How’s any company in France doing right now?” (This of course was last week)

    The bubble popped in Japan after its tremendous growth in the 80’s. No matter how good any company was, people sold because they didn’t trust the country and their currency once that bubble hit.

    What did you expect to prove from throwing out Nasdaq or Nikkei? That you yourself know nothing about what an Index is supposed to do? If you said something intelligent like the Wilshire Index, you might be able to make a real case against diversification but your points are as bad as a college freshman in Finance 101.

    Comment by bgmorgan -

  13. Mark’s advice and most of his followers are laughable. Only bgmorgan seems to have any sense. Average Joe needs simple and cheap investment opportunities and the stock market allows for that, and a lot brighter idea than holding cash. You can be scared of some drops or you can be sure to lose money to inflation. The target rate is 2%, so you should lose that much value every single year at least.

    If you invested in cash in 2001, you would have lost 27% (based on BLS calculator, confirmed by another)

    If you invested in VTI in Aug 2011 (right before the market dived with 9/11 and also including this recent correction), you’d be up 12.75%. You’d be up almost as much with DJI and just barely positive with S&P 500, plus playing the whole market is the safer and more diverse bet.

    Want to know what you are investing in, just look: https://personal.vanguard.com/us/FundsAllHoldings?FundId=0970&FundIntExt=INT&tableName=Equity&tableIndex=0&sort=marketValue&sortOrder=desc

    3342 Holdings, from Exxon, Apple, and IBM to Ener1 Inc. and regional banks. I can’t imagine how much commission would be paid to buy those stocks individually without an ETF…

    If you remember that 99.99% of people out there can only passively invest and do not run the companies they buy into, then you will realize Mark that what you do is not feasible nor is your advice very relevant for the Average Joe. Average Joe just needs to invest and forget, not selling when a correction occurs and be as broad and diverse in the US and world markets as possible.

    Comment by commaagain -

  14. “The point of diversification is to NOT be too leveraged in any sector, especially any stock. Sure Citi shit the bed but no one stock should be a major part of your portfolio. There are plenty of examples of losers throughout the last 20 years but there are just as many if not more examples of winners and even if it was 50/50, you still made money if you were getting dividends and they were re-invested.”

    I see you’ve conveniently ignored my examples of the Nasdaq in 2000 and the Nikkei in 1989.

    Comment by davidpinsen -

  15. Hi Mark,

    Rob Long posted a response to this on Ricochet: http://ricochet.com/main-feed/Mark-Cuban-Ends-the-Great-Recession

    Comment by ricochetdotcom -

  16. Hi Mark — would love it if you would write a book about your entrepreneurial path, ala Richard Branson’s Losing My Virginity (please don’t write about losing your virginity). Really like this blog and I would love to read your extended perspective on business, the markets and entrepreneurialism, in general. Any chance of that happening?

    Comment by dougalbertson -

  17. Mark – great interview with “the big interview” also great call on patent reform. Much better things GOOG could have done with their cash…

    Comment by johnforys -

  18. Epic greatness, once again!

    http://www.youtube.com/user/hailguardian?feature=mhee#p/a/u/0/jsHntoOMdhk

    You can block me, Mark, if you like. Will have no hard feelings if you do. But until that moment, I am going to continue to attempt to get your attention with substantive content of tremendous value to your pocket book and your “Mark Cuban” brand in Texas and across the 60% of the USA which this benefits. All the best.

    Comment by hailguardian -

  19. Spot on Mark, in my book http://www.thistimeitsdifferentnot.com I provide details to back up what you have written in this post!

    Aivars Lode

    Comment by alode -

  20. I have been following insider transactions for over a decade. Since 2002, insiders require to file within two business days from date of transaction, down from the 10th day of the month following the month of transaction. This means you can get a about the same price buying/selling with insiders.

    However, they tend to buy/sell too early. You may see an initial pop but that is about it. They may have an inside advantage, but when it comes to making money in the markets it is a different story.

    Comment by mrubinson -

  21. “And if you are terrified you just wont have enough, the operative word is enough. Not quite having enough saved is far, far , far better than losing money. You have no way of knowing where the market is going to be when you believe its time for you to retire. Talk about ultimate in trying to time the market. You have to time your retirement to when the market isnt in a decline”

    Finance 101 will tell you to be in low-risk investments when you get close to retirement so the market won’t necessarily be relevant because you will be making fixed income. Sure those bonds can default but if muni’s and the government are defaulting, then there a lot more things you should be worried about than your retirement because the money you saved might be worthless anyway thanks to the dollar being worthless.

    The word enough is always tough to gauge.

    Hey Mark, what if you put your eggs in one basket like the Heat and not spread out your cap to build a TEAM?

    Seems like your a fan of diversification to me.

    Comment by bgmorgan -

  22. ““So basically, if someone doesn’t have insider information… they shouldn’t invest at all in stocks???””

    “Information advantage” ≠ “insider information”. Mark has blogged about examples of him successfully investing in tech stocks, not because he had inside information about them, but because he had an information edge — he knew more about the line of business they were in than most other investors.”

    Sure, I know a lot about the financials, does that mean I should invest in my favorite company?

    No.

    The government killed the financials with these capitalization and low risk regs. I’m not saying that they weren’t necessary to a point, but the government can kill any sector at any point, which is why it’s not smart to have all your money in one place. No matter how good a company is, the market will sell if they believe that sector is in trouble. In this market, it’s not even sectors anymore.

    How’s any company in France doing right now?

    Comment by bgmorgan -

  23. Davidpinsen,

    I don’t think you get what diversification and asset allocation means if you’re going to say this:

    ““Like I said in my first post, if you didn’t change your invests from 08-10, then you made back the money you lost in 08.”

    That really depends on what you were invested in. If you were invested in such “blue chip” Dow components as Citigroup and GE, you’re still down on those, despite the rally from the ’09 lows. But consider some other examples. What if you bought the Nasdaq in March 2000? Still down, 11+ years later. What about the Nikkei in 1989? Still down, 22 years later.”

    The point of diversification is to NOT be too leveraged in any sector, especially any stock. Sure Citi shit the bed but no one stock should be a major part of your portfolio. There are plenty of examples of losers throughout the last 20 years but there are just as many if not more examples of winners and even if it was 50/50, you still made money if you were getting dividends and they were re-invested.

    “Mark’s point is that most people shouldn’t invest in publicly traded securities in the first place.”

    Not everyone has the extra cash sitting around to invest in start up companies or be an entrepreneur. Restricted stock is hard to get into if you’re an average Joe. If you don’t invest in PTC’s, then where are you supposed to invest? Mark’s point is cash, but I’d rather test the market than have my money eaten alive by inflation in the next 20 years.

    Comment by bgmorgan -

  24. “So basically, if someone doesn’t have insider information… they shouldn’t invest at all in stocks???””

    “Information advantage” ≠ “insider information”. Mark has blogged about examples of him successfully investing in tech stocks, not because he had inside information about them, but because he had an information edge — he knew more about the line of business they were in than most other investors.

    Comment by davidpinsen -

  25. Sorry commagain, didn’t see this:

    ““Mark’s advice about investing is that you should invest only where you have an information advantage. And since most investors don’t have an information advantage, they’re better off not investing in most publicly traded securities.”

    So basically, if someone doesn’t have insider information… they shouldn’t invest at all in stocks???”

    I agree 100%.

    How did insider information work out for all the hedge fund leaders who are now sitting in jail.

    Sure it sucks to not have that insider information but that doesn’t mean you can’t make money.

    Comment by bgmorgan -

  26. BGMorgan,

    Just to clarify, I’m not making exactly the same point as Mark. I agree with Mark that asset allocation and diversification don’t protect investors from all risks. My point is that investors ought to consider hedging against the sort of risks (such as market risk) that can’t be eliminated by diversification and asset allocation, especially when hedging is relatively inexpensive to do so (as it was about a month ago, when volatility was still low).

    Mark’s point is that most people shouldn’t invest in publicly traded securities in the first place.

    “I don’t care what your invested in, market risk is always a risk unless your invested in defensive stocks.”

    Defensive stocks don’t protect against market risk. And just because Treasury bonds did well in 2008 doesn’t mean they’ll do well during the next crisis.

    “Like I said in my first post, if you didn’t change your invests from 08-10, then you made back the money you lost in 08.”

    That really depends on what you were invested in. If you were invested in such “blue chip” Dow components as Citigroup and GE, you’re still down on those, despite the rally from the ’09 lows. But consider some other examples. What if you bought the Nasdaq in March 2000? Still down, 11+ years later. What about the Nikkei in 1989? Still down, 22 years later.

    Comment by davidpinsen -

  27. What if you’re an investor who was smart and now has no debt? What if you’re an investor in your 40’s or 50’s who have paid their mortgage by now but are 20-30 years away from retirement? You’re saying to sit in cash and have a good night’s rest?

    If people sit in cash and inflation kicks in, then 30 years from now when commodities cost substantially more, that cash they saved up isn’t worth anything. Think about if someone saved $50k in the 1960’s and didn’t touch it until now. Sure you didn’t lose the money but back then you could’ve bought yourself a nice house anywhere in the country and that house could be worth 10x or even more. Fast forward to now you’re looking at 5 years rent in most situations or that money could be used as a down payment. Money is always worth more now than it is later and inflation is always a risk. I’d rather my money grow with inflation than be eaten alive.

    Comment by bgmorgan -

    • Absolutely. Individuals can control their own personal inflation rates. Gas too high, trade for a smaller car. Use the cash to get best possible deals on consumable items. etc

      And if you are terrified you just wont have enough, the operative word is enough. Not quite having enough saved is far, far , far better than losing money. You have no way of knowing where the market is going to be when you believe its time for you to retire. Talk about ultimate in trying to time the market. You have to time your retirement to when the market isnt in a decline

      Comment by markcuban -

  28. Davidpinsin,

    I understand your point, but your theory and therefore Mark’s theory is a pipe dream. Information advantage is some cases is also known as insider trading when it comes to public companies, and if you’re saying “If you know a lot about tech companies, then put your money in the companies you think will do well” then it goes back to what I was saying about sector risk. One regulation set by the government can ruin a sector, no matter how good that company is vs. it’s competition.

    As far as Mark’s Broadcast example, no one should be stupid enough to put all their money in an IPO so it doesn’t matter, especially if they are well diversified.

    I don’t care what your invested in, market risk is always a risk unless your invested in defensive stocks. But defensive stocks usually don’t yield great returns and what if the government decided Coke is bad for the fat kids and decided soft drink companies have to pay taxes like Tobacco companies? There’s examples for almost every sector where the government can hurt them. What if your invested in a stock like Con-ed and the government says that solar is required for all of New York?

    Sector risk is always a risk no matter what kind of stocks you’re invested in. What if the government decides the internet should be free? Say goodbye to high returns from VZ and AT&T. The government is killing the car industry with the mileage rules. They got hurt enough and now have to spend more money in R&D. What if your invested in oil and the government decides we need to go with a cleaner form of energy. What if you’re in pharmas and the government decides that their needs to be a longer testing period for these drugs. What if you’re pessimist and put your money in gold and then the government gets their head out of their ass and all of the sudden the dollar is worth something again?

    It’s never smart to put your money in one place because anything could happen at any moment.

    I get what Mr. Cuban is trying to say and I agree that being diversified and evenly allocated can’t substantially change your future, but if you are evenly allocated it can’t ruin your future. Like I said in my first post, if you didn’t change your invests from 08-10, then you made back the money you lost in 08. The only way your future can be ruined is if the country blows up. Honestly. Older people looking to retire should have been in fixed investments and if that’s the case THEY MADE MONEY IN 2008 for the most part. Younger people made their money back if they had a halfway decent adviser.

    Sure if you’re looking to make a million dollars from a thousand, then spend away in your concentrated invests but that’s just not realistic. 99.99% of the population doesn’t have the money to do that and I feel like Mark Cuban is a role model to a lot of people and therefore shouldn’t give this type of advice because he can do a whole lot more harm than good to the average Joe.

    Comment by bgmorgan -

    • and just think , if you just stayed in cash and paid off your debt you would not only be up, but you would sleep a ton better at night

      Comment by markcuban -

  29. It is already happening between countries. China is paying for companies to relocate and create jobs.

    What is going on b/w cities and even counties right here in Los Angeles is healthy in the long term, if it brings down the cost of doing business in the country. Businesses are getting incentives to relocate from Santa Monica to Los Angeles, if only to bring jobs. That is only a few miles apart. That forces funds to be reallocated from the public sector to the private sector; if you fix the debt limit, instead of spending the money on gov’t programs in goes to the private sector.

    Comment by mrubinson -

  30. I think you’re basically right regarding what Mark said. Nevertheless, the money being allocated is still taxpayer money. The historical handing out of money by either the federal or state governments doesn’t make it a good practice. All government largesse comes from the taxpayers and interferes with market mechanisms based on consumer preference and savings. Unfortunately, people are under the illusion that we enjoy a free-market system. Not to belabor the point, but if you’d be offended if the government set the price of strawberries, why wouldn’t you be offended that they (via the Fed) set the price of the most important commodity: money. Point being, the economy and the government have no business being in bed together.

    Comment by petediorio1 -

  31. The best way to take advantage of a fund’s diversification is when you have a large fund, in the hundreds of billions, being the largest shareholder in a company, but the position is a fraction of 1%. When these guys dump shares, even when the company in question is already deeply undervalued, it is barely noticeable for the fund but makes a difference for the smaller players or for the managers that are less diversified. You can see this same movie play again and again and that is why having dry powder, even if there is deflation, is just common sense.

    Comment by mrubinson -

  32. commaagain,

    They sell because they need funds for new house, car, college, retirement etc in the next few years. Essentially, when things go up it is a buy-and-hold and when things drop it is a panic.

    Ask fund managers and brokers to describe the experience when markets drop.

    Comment by mrubinson -

  33. Pete, I think he said a private company should be in charge of it. The US already gives billions for R&D, so handing out money to the private sector is nothing new. He wants a programs to be tied to jobs, from my understanding, which many states are already doing when a large business tries to negotiate relocation to friendlier state(s).

    Comment by mrubinson -

  34. DavidPinsen,

    “Mark’s advice about investing is that you should invest only where you have an information advantage. And since most investors don’t have an information advantage, they’re better off not investing in most publicly traded securities.”

    So basically, if someone doesn’t have insider information… they shouldn’t invest at all in stocks???

    Of course the whole market went down in 2008. But taking the average is better than taking a few big losers solely. Since no one can predict the future, you can’t be sure that your ‘winners’ won’t tank. Are you saying anyone’s choices would have done better necessarily than the market average? (Plus you only realize the loss when you sell. If you ride it back up, no harm. If you held it for a long time and still higher than original price, then still positive. Short-term buying high and selling low is vice.)

    Not everyone has the $, time, or energy to be entrepreneurs. They focus on obtaining a salary for their work and may have some funds left over to invest so they’ll have a greater amount in the future. So they should just avoid the stock market altogether because Mark tells them that it is for suckers? (because they don’t know everything about every company) Not buying it.

    Comment by commaagain -

  35. Hi Mark. I saw your interview with the WSJ (The Big Picture. Good stuff. But your idea of having the government take taxpayer money and “decide” what companies should receive an investment simply perpetuates intervention in the marketplace, and I think opens the door for continued malinvestment. I noticed an article at The Daily Realist that specifically challenges your redistribution idea. I would be interested to know your thoughts.

    Here’s the only link I could find:

    http://campaign.r20.constantcontact.com/render?llr=b84bm6fab&v=001JbwlstczWI5x_zqZe47RI8EwiRPcVSYnYH3iXsQoTQ0xcBk1XYAUa6T5fhjfv7sMzmLfKijIu8kw8VSDoQE3jhy1CLgpIFM7oe2KNaKnuUinAgK4Ismc-ilYS71ArQJ_fQ70m2MlHDY%3D

    Go Mavs
    Pete

    Comment by petediorio1 -

  36. For the vast majority of Americans who are busy working and raising a family, how well can they fully understand any company? How can they compete with analysts who study one subject matter for 80 hours a week? And if you advocate only choosing a few well-known eggs in your basket, what if one or several go bad? What if you invest primarily in the next Enron?

    You act as those a typical household knows the in/outs of companies, yet has no capability of basic fund portfolio research.

    The most basic concept people need to understand is to spend less than they make. What they can save and what more they can invest ought to be done in a low-risk and simple manner. ETFs allow for that, by spreading risk across multiple companies and industries so a single shock won’t wipe them out. Taking average returns is what you get from playing the whole field, not assuming an average American can pick better than the pros or even a broker charging you a fee to do so (pay him win or lose). You can’t be wiped out playing the entire market unless the entire system crumbles… and if that happens, so will any particular stock you would have chosen otherwise would too.

    @mrubinson: If you sell when you panic over a price drop… you really aren’t “buying and holding” are ya?

    Comment by commaagain -

  37. BGMorgan,

    Diversification reduces stock-specific risk, but not market risk. When the market tanked in 2008, it didn’t matter if you were diversified among 500 stocks — chances are, nearly all of them went down. The same is largely true of asset allocation: when the sh*t hits the fan, correlations go toward one. Using the example of 2008 again, almost all asset classes tanked at the same time — gold, oil, stocks (Treasury securities were an exception, but who knows if they will be next time).

    You mention hedging in your comment, and that is a way to limit market risk. I mentioned examples of how to do that in the two articles I linked to above, “Lessons from Monday’s Market Meltdown” and “Plan not to Panic”.

    Mark’s advice about investing is that you should invest only where you have an information advantage. And since most investors don’t have an information advantage, they’re better off not investing in most publicly traded securities. In theory, the way around that would be for an average investor to let someone with an information advantage invest his money for him, but Mark has expressed skepticism about professional money managers’ ability to do that in the past. For a specific example, see Mark’s old blog post about his roadshow for Broadcast.com, Taking Stocks:

    “Part of the process of taking a new company public is something called a road show. The road show is just that. A company getting ready to sell shares visits the big mutual funds, hedge funds, pension funds – anyone who can buy millions of dollars of stock in a single order. It’s a sales tour. 7 days, 63 presentations. We often discussed turning up the volume on the stock. It was the ultimate “Get Loud.” Call it Stockapalooza.

    Prior to the road show, we put together an amazing presentation. We hired consultants to help us. We practiced and practiced. We argued about what we should and shouldn’t say. We had Morgan Stanley and others ask us every possible question they could think of so we wouldn’t look stupid when we sat in front of these savvy investors.

    Savvy investors? I was shocked. Of the 63 companies and 400-plus participants we visited, I would be exaggerating if I said we got 10 good questions about our business and how it worked. The vast majority of people in the meetings had no clue who we were or what we did. They just knew that there were a lot of people talking about the company and they should be there.

    The lack of knowledge at the meetings got to be such a joke between Todd and I that we used to purposely mess up to see if anyone noticed. Or we would have pet lines that we would make up to crack each other up. Did we ruin our chance for the IPO? Was our product so complicated that no one got it and as a result no one bought the stock? Hell no. They might not have had a clue, but that didn’t stop them from buying the stock.”

    Comment by davidpinsen -

  38. Mark,

    Thank you for the post. I came across your name > blog through the WSJ’s video interview, “Cuban on Investing: Diversification Is for Idiots” (8/12/2011 12:45:56 PM), http://online.wsj.com/video/cuban-on-investing-diversification-is-for-idiots/233AE43E-9DA3-40A3-8F6B-9DC23DD82BEF.html

    I have read much about the industry and also worked there, and believe by understanding the pluses/minuses of managing for clients it is possible for the average person to beat the pros. There is too much focus on quarterly numbers and diversification (stable asset base), because that affects AUM, which is the most stable of the fees and keeps you in business. It is tough but my 10-year track record proves that it is possible to beat the pros by a wide margin. It requires a great deal of discipline and research. There is no free lunch.

    Never really believed in buy/hold. I remember discussions with my investment professors on why it doesn’t make any sense, but it is fine. Buy/hold tend to buy/sell on panics (emotionally), which results in the best prices out there. It is not just retail. It includes buying/selling by managers with many analysts that should know better, but may have no choice.

    On a related note, here is a piece worth quoting, from Seth A. Klarman’s book Margin of Safety: “Investors need not condemn Wall Street for [having conflicts of interest and a short-term orientation] as long as they remain aware of it and act with cautious skepticism in any interactions they may have.”

    Cheers.

    Comment by mrubinson -

  39. If you are a member of LinkedIn, here is a “link active” version of Hail Guardian:

    http://slidesha.re/nag8OZ

    Have a great Sunday everyone. Mark, it sure does look like Shark Tank has officially passed us over for season 3. It’s a head scratcher. Sure, everyone drinks their own kool aid, but kool aid is getting rich with all the folks yearning for Hail Guardian to be on the show and be in a store near them for next hail season. Please don’t make us suffer through more broccoli wads, electronic turkey basters and kid vomit bags. Entrepreneurs and would be entrepreneurs are the viewers of the show and we cringe at such things and pray for something of relevance and need to walk through those doors. You don’t need the fame and you certainly don’t need the appearance check. Don’t let them make a fool of your time. And ours for that matter.

    Comment by hailguardian -

  40. Mark, interesting read yet it is clear you did not spend the 30 seconds required to investigate those funds mentioned. I invest in a simple allocation of VTI, VNQ, and VEU. Vanguard has a great profile on each with plenty of information – including top 10 holdings within the funds. Don’t claim they are trying to pull a shade over our eyes just because you don’t pursue the information at all.

    ETFs make investing easy by allowing a very diverse allocation with minimal commission required. That was kind of the goal of Vanguard during the thesis that he invented ETFs with.

    Comment by commaagain -

  41. Mark – this post reminds me of my first poker game. I had never played poker before and didn’t understand any of the rules of the game. But I had $20! So my friends invited me to the poker game. I got wiped out – very quickly. Later I realized that my friends knew I was a rube – that was the reason why they invited me.

    The “buy and hold” strategy, the mind-numbing diversity of financial products – the relentless marketing by the financial services industry — it’s all about bringing rubes to the table, to put their money in the game, then get wiped out.

    Comment by blogguyyy -

  42. Mark,

    As usual very thought provoking stuff and content. A forum where people can collaborate on ideas to make money…..could be the end result of this discussions. One could argue that people do that today….I would counter..how many are facilitated by a guys who is BILLIONAIRE and whose credibility is unmatched.

    I am in awe that you take the time to blog this content and respond to the comments. To all of those that disagree with Mark…..I would like to see your W2!

    Comment by jtamoe46 -

  43. Pingback: Wall Street's New Lie to Main Street – Asset Allocation/Diversification – blog maverick | 2 to 4 Units

  44. I see Mark’s point, but people should keep in mind that the real return on cash is really negative.

    Comment by markpitts -

    • not true. First, you still dont know if there will be deflation, but not likely but there is a chance. Second, with cash you have the opportunity to take advantage of cash and volume discounts available to any consumer. Things you cant do without cash. So the concept that cash loses value because of inflation is wrong for most consumers

      Comment by markcuban -

  45. Mark,

    By the way: I know you’re swamped, but I think there are only a few days left on your promo code for the Portfolio Armor iOS app, so if you could download it soon and try it out, I would be grateful. Apple only gives me a limited number of those promo codes.

    Thanks a lot.

    Comment by davidpinsen -

  46. Mr. Cuban,

    I’m a huge fan, I wish you owned all my sports teams, but I disagree with you in that it seems you really have no clue of what you’re talking about and therefore shouldn’t be giving this type of advice.

    When they say buy and hold, it generally pertained to dividend yielding stocks. If your re-invest your dividends, you will generally double your money after a certain period time because those companies that can give out dividends, are generally solid companies that have decent growth. Why buy and hold isnt as effective anymore is there arent as many stocks out there giving out dividends. It’s still a good strategy, and it was a great strategy, you just don’t have as much to choose from and therefore could cause a higher risk exposure. Your post made it seem like Wall Street was lying to investors for years when in fact dividends is what drove a lot of people to double or triple their wealth, slowly but surely.

    The point of asset allocation is to avoid risk. We don’t have millions of dollars to do concentrated investments like you. What if you put your money in a company and the government puts out a law that kills that company. For example if the government decides the internet should be free, Verizon will be screwed. Take a look at th financials, these cash and low risk regulations hurt them significantly. Cheap importing rules screwed the manufacturers. Its all about avoiding concentrating risk, mixing high growth potential (stocks) with income (fixed) and hedging yourself. You invest in emerging markets because while we had the recession in 08, emerging markets were still growing. Countries like China and India are still growing. You invest in TIPS because we’re due for inflation. If you diversify in all of those things, if one of them shits the bed, you at least won’t lose all your money and if the world economy is great, you’ll gain from all areas.

    I feel like your post address doesn’t why brokers told investors to diversify and focus on allocation (aka risk tolerance) and you’re not really giving anyone any real advice other than invest in something you like (which could cause people to lose all their money instead of some of their money in most cases)

    It’s easy to bash brokers but investors give them money because they know about emerging markets, TIPS, REITs, bond funds, etc. If they don’t, their firm will, if they didn’t theres thousands of brokers that people can give their money to. They all sell the same products so if your broker doesn’t do a great job (vs. the market) then you can go to one that has.

    To say put your money in something you believe in is no different putting it on red on the roulette wheel. You either win or lose, there’s no support from other income if you lose. You diversify to avoid risk because usually when one company within a sector loses money, the others do. (financials, tech stocks in the early 00s are the best example) Sure buy and hold sucked in 08 but those that stayed in their holdings made back their money in 09 and 10 and continued to gain dividends at the same time.

    The people you should be mad at is the bickering politicians, not the brokers.

    Comment by bgmorgan -

    • when you invest in something you dont fully understand, your risk increases because you never know the appropriate time to sell. When you invest in multiple things you dont understand your risk increases significantly

      Comment by markcuban -

  47. Good point about the limits of asset allocation and diversification managing risk. I made similar points here, “Plan not to panic”, and here, “Lessons from Monday’s market meltdown”.

    Comment by davidpinsen -

  48. Mark, i get ur point but the underlying idea of asset allocation is that no one knows which mkts/assets will out perform. By getting a slice of many, volatility drops, and returns are smoothed.
    Asset allocation can mean “the hell with it, i have no clue which country or strategy will outperform this year or next.”
    So to say wall street is asking main st to buy something they dont understand, yeah thats kind of the point. No one “understands” the future returns so diversify. Or just stay out of the mkt.

    Comment by wardck -

    • it goes the other way too. Instead of gains, they could all lose money. It will smooth your losses, but wont smooth your feelings. Im willing to bet you have no idea about the various asset classes you are giving money to. You might as well throw darts at the wall street journal to pick .

      Read my how to get rich post. Payoff your credit cards, use your cash to get discounts. For 99pct of the people in this country, thats the best investment strategy. You can out think inflation by being a smarter consumer. You cant out think asset classes you dont understand

      Comment by markcuban -

  49. Mark,

    26 making decent money and starting and IRA. What would you suggest I invest in?

    Comment by jkarmann0 -

  50. Well this is great but then where am I supposed to invest my money. The fact of the matter is, a well diversified portfolio – say 100-your age in bonds, rest in stocks – has had provided the greatest return on investment for an average investor over the last 100 years. There are not lots of other investment options for those of us that have to work 40+ hours a week plus take care of a family. Yea I can keep my money in cash or put it in CDs but where does that get me when the real return on these investments is negative. I agree that being able to invest in individual companies, preferably start ups might be better but who really has time to play angel investor or analyze individual balance sheets. Let me know if you know of a better investment option than a well diversified portfolio – better meaning higher return, lower risk – and I will be sure to send them a check.

    Comment by mre1905 -

    • who says you have to invest your money. You arent going to make your future by investing in the market, but you can definitely screw up your financial future by doing what you are suggesting.

      Be patient.

      Comment by markcuban -

  51. Couldn’t have said it better myself. Always great to your insight.

    Comment by classydata -

  52. Hi Mark: My dad read your article and told me that after his 29 years as an investment advisor/manager in is opinion the biggest lie from Wall Street is NOT selling the benefits of asset allocation but its that a “buy and Hold” approach to asset allocation works in all kinds of markets. Buy and hold has failed miserably for the last 11 years and will likely continue to fail. A buy and hold approach to asset allocation insures that an investor will own the worst performng assets and ignores the fact that in severe market declines such as 2008 most assets decline at the same time.

    Comment by dannynunes -

Comments are closed.