Archive for April, 2011

The importance of a fixed asset allocation

Most investors do not prioritize asset allocation as the most important aspect of their portfolio decision-making process.  For them, asset allocation is what results after a series of security selection decisions.  Other investors may prioritize asset allocation a bit higher, but are constantly changing it in an attempt to take advantage of the next trend in security popularity.  The cognitive investor’s process starts with a fixed asset allocation that drives security selection and market timing decisions.  This is a fundamentally different mental model, and it forces the investor to focus on answering a completely different set of questions from those addressed by the conventional media or the purveyors of most financial products and services. Read the rest of this entry »

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The importance of asking the right questions

As a  long time market observer, one of the questions I am most frequently asked is: what do I think the stock market will do next?  This question makes me wince.  Why?  Almost any answer I give is fruitless. I could give a very accurate answer, which is what J.P. Morgan did when he was repeatedly asked the same question many years ago.  He said, “Prices will fluctuate.” I could be a little more specific and say, “On average, if history is any guide, prices will rise 20 out of the next 39 days and fall 19 of those days. The particular sequence is unpredictable and unknowable.” Or I could be ultra-specific and say, “The S&P 500 will rise by 4.2% in the next three months.” But why should anyone believe an answer as precise as that?  Such predictions are no more than guesses, and even if you gathered a bunch of them from every market pundit, you would simply be taking a sample of the consensus, which may or may not turn out to be true. We know that such forecasts are about as accurate as rolling dice, so why even ask? Read the rest of this entry »

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