02/22/2006
My friend and fellow investment pro John Mauldin, author of Bull's Eye Investing, a book I highly recommend, recently wrote about the tendency of investors to project their recent experiences into the future. This is a natural tendency, but it's one that can get you into trouble if you apply it to your investment strategy.
As Mauldin explains, "It is part of the human psyche, and one of the main reasons that analysts and investors are so wrong in their predictions. It is why we have runaway bull markets and every now and then bubble markets. We move the price of an asset class until it is priced for perfection. Then along comes a disappointment and the bull stumbles or the bubble is pricked."
Basically this is why there is, and will always be, a high-degree of risk baked into what seems to be great market conditions. Investors who have not experienced a major pullback in several years, or who have become accustomed to historically low interest rates, or who have otherwise not lost money in equities or their homes have the mistaken conviction that those conditions will continue ad infinitum. That mistaken belief causes things to meltdown fast when reality steps in and crushes investor misconceptions.
Mauldin's sage observations brought to mind another investment pro's keen observations on the market. I am speaking here about my father, Dick Fabian, who started me in this business over thirty years ago.
Dick created what is now the Successful Investing newsletter out of the ashes of the bear market of the 1970s. I would like to share a few of my dad's deep insights on investing. The following are a few of his "investing axioms."
Axiom A: SET AS YOUR INVESTMENT GOAL A SPECIFIC COMPOUNDED GROWTH RATE
Every investor needs to determine for themselves what kind of rate of return they want to achieve from their money. Is your goal 6%, 8%, 10% or more? If you don't know what your goal is, you'll never achieve it. Once you determine this goal, you need to find the right plan that will get you there. By setting a specific goal you will know how to evaluate a potential investment to see if it is right for you. If the investment does not meet your criteria for annualized compounded growth rate, ignore it and move on.
Axiom B: ALWAYS HAVE ALL OF YOUR AVAILABLE INVESTMENT DOLLARS WORKING
Are you currently taking advantage of what the market is giving you with at least 90% of your investment assets? If not, why not? Do you think you can reach your goals with anything less? If you are going to succeed in this game, you've got to be "in it to win it." That doesn't mean, however, that you ignore risk. Just the opposite is true. You get into the market when things are right, and you get out of the market when things get tough.
Axiom C: THE VALUE OF TREND FOLLOWING
The value of the Fabian Plan rests on its ability to objectively follow market trends. This is NOT market timing, but rather, a methodology for knowing when to be in, and more importantly, when to be out of the market.
Trend following depends only on discipline. Without exception, everyone has the capacity to be a disciplinarian and follow simple rules. Our trend-following plan was adopted to help investors preserve capital during declining markets. It has always been our belief that the only people who can ever be wiped out by a severe and long lasting market crash, are those who participate in such declines. Trend-following enables us to stand aside.
Our approach adopts what might be called a "buy-and-hold" approach during bull markets, and then moves to money funds or other safe vehicles during bear markets. To the extent that an investor successfully follows this approach, principle is preserved while the market is falling and then one participates again once a new bull market is recognized.
In today's radio show I will air a recent interview I conducted with my Dad, and we will get into more detail about our investment strategies, so be sure to tune in.
If you would like to find out more about the Fabian Plan and its risk management strategies, I invite you to click on the link below.
http://www.fabianssuccessfulinvesting.com/order.php?offer=12
Dividend investors are an impatient sort, always seeking out ways to get more out of their money. Fortunately, the quest for high-paying investments has not gone unnoticed by one ETF provider: PowerShares.
PowerShares' ETFs are not like conventional ETFs, in that they are not directly tied to an index such as the S&P 500, Nasdaq 100, etc., but they aren't constructed at the whim of a portfolio manager either. PowerShares' ETF offerings are still objectively managed, but they are based on what the company calls its intelligent indexes, or "Intellidexes" of specific market segments.
According to PowerShares, their ETFs are "based on Dynamic Indexes that use rules-based quantitative analysis. This Intellidex methodology chooses stocks for their capital appreciation potential, evaluating and selecting stocks based on multiple valuation criteria." What this translates to is a selection of the most attractive stocks in a particular market segment, and not just the stocks that happen to comprise a given industry. It's kind of a "best of the best" representation of specific areas of the market.
A few months ago PowerShares rolled out several new dividend-based ETFs to go along with their one existing dividend offering, the PowerShares High Yield Dividend Achievers (PEY), introduced back in December of 2004.
The first new offering is the PowerShares Dividend Achievers (PFM). The salient feature of PFM is that it only includes companies that have increased their annual dividend for ten or more consecutive fiscal years.
The second new PowerShares ETF I is the High Growth Rate Dividend Achievers (PHJ). PHJ concentrates on the 100 companies with the highest 10-year annual dividend growth rates.
In my view, the most interesting of the new PowerShares funds is the International Dividend Achievers (PID). This fund is made up of international stocks and American Depository Receipts (ADRs) that have increased their annual dividend for five or more consecutive fiscal years.
If you are a dividend investor in search of better returns, check out these three new PowerShares offerings.
"If devotion to truth is the hallmark of morality, then there is no greater, nobler, more heroic form of devotion than the act of a man who assumes the responsibility of thinking."
— Ayn Rand
Isn't it time you assumed the responsibility to think about your financial goals? Please allow me to help.
Wisdom about money, investing and life can be found anywhere. If you have a good quote you'd like me to share with your fellow Making Money Alert readers, send it to me, along with any comments, questions and suggestions you have about my radio show, newsletters, seminars, or anything else.