PETER MALLOUK is President and Chief Investment Officer of Creating Planning and its affiliated companies. Peter's companies provide comprehensive wealth management services to their clients, including investment management, financial planning, charitable planning, retirement plan consulting, and tax and estate planning services.
Preface xiii Acknowledgments xv About the Author xvii Legal Disclosure xix Introduction The Market Wants to Be Your Friend xxi Mistake #1 Market Timing 1 The Idiots 5 Why Is It So Hard to Beat the Market? 6 Efficient Markets 7 The Evidence (Research and Stuff) 8 The Media Get It Wrong, Over and Over Again 8 Economists Get It Wrong, Over and Over Again 9 Investment Managers Get It Wrong, Over and Over Again 14 Newsletters Get It Wrong, Over and Over Again 17 Your Buddy 18 Strategies That Don't Sound Like Market Timing but Are Market Timing--Oh, and They Don't Work Either 19 Asset-Class Rotation 19 Tactical Asset Allocation 20 Style Rotation 20 Sector Rotation 20 What Smart Investors Have to Say on Market Timing 20 Knowing All This, Why Would Anyone Market Time? 21 Corrections 22 Bear Markets: An Overview 26 Bear Markets Happen for Different Reasons, but the Outcome Is Always the Same 27 Bear Markets Are Not Predictable 28 When Bear Markets "Turn," They Make People on the Sidelines Look Silly 30 The Market Is Volatile--Get Used to It 30 You Can't Wait for Consumers to Feel Good 31 Learning to Accept the Bear Markets 33 Miscalculating the Risk of Market Timing 34 But What If I Am Perfect? 34 Lump-Sum Investing versus Dollar-Cost Averaging 36 Learning to Fly 40 Avoiding Mistake #1--Market Timing 41 Mistake #2 Active Trading 43 The History of Active Trading 44 Active Investment Managers Lose to Indexing 45 Newsletters Lose to Indexing 45 Active Mutual Funds Lose to Indexing 45 Survivor Bias (a.k.a. Mutual Fund Performance Is Even Worse Than the Data Suggests) 47 What About the Winners, Huh? What About the Winners?! 48 Hedge Funds Lose to Indexing 51 Endowments--Misperception of Performance 56 Venture Capital (Sounds Sexy but Usually a Dog) 57 The Taxman Cometh (a.k.a. Dear Goodness, It Gets Worse) 59 Portfolio Activity Hurts Performance 59 But Doesn't Active Management Work in a Down Market? 60 Why Indexes Win 61 But Indexing Results in Average Returns 62 S&P 500, Here I Come! 62 Avoiding Mistake #2--Active Trading 64 Mistake #3 Misunderstanding Performance and Financial Information 65 Misunderstanding #1--Judging Performance in a Vacuum 65 Misunderstanding #2--Believing the Financial Media Exists to Help You Make Smart Decisions (a.k.a. the Media Is Killing You) 67 Misunderstanding #3--Believing That the Market Cares About Today 71 Misunderstanding #4--Believing an All-Time High Means the Market is Due for a Pullback 74 Misunderstanding #5--Believing Correlation Equals Causation 77 October Is The Worst Month to Invest 77 Sell in May and Go Away 78 Misunderstanding #6--Believing Financial News Is Actionable 79 Misunderstanding #7--Believing Republicans Are Better for the Market Than Democrats 80 Misunderstanding #8--Overestimating the Impact of a Manager 82 Misunderstanding #9--Believing Market Drops Are the Time to Get Defensive 83 Avoiding Mistake #3--Misunderstanding Performance and Financial Information 84 Mistake #4 Letting Yourself Get in the Way 85 Fear, Greed, and Herding 85 The Overconfidence Effect 89 Confirmation Bias 93 Anchoring 95 Loss Aversion 97 Mental Accounting 98 Recency Bias 100 Negativity Bias 103 The Gambler 105 Avoiding Mistake #4--Letting Yourself Get in the Way 106 Mistake #5 Working with the Wrong Advisor 107 Most Advisors Will Do Far More Harm Than Good 108 Advisor Selection Issue #1--Custody 108 Advisor Selection Issue #2--Conflict 113 Test #1--Independent Advisor or Broker? 114 Investment Advisor Defined 114 Broker Defined 114 So What's the Difference? 115 Test #2--Pure Independent versus Independent and Broker 116 Test #3--Proprietary Funds versus No Proprietary Funds 117 A Final Thought on Conflicts 118 Advisor Selection Issue #3--Competence 119 Competence Check #1--Do the Advisor's Credentials Meet Your Needs? 120 Competence Check #2--Is the Advisor Right for You? 120 Competence Check #3--Is the Advisor Following a Process That You Agree With? 120 A Final Thought on Advisors--Principles 121 Avoiding Mistake #5--Choosing the Wrong Advisor 122 Mistake #6 No Mistaking 125 Rule #1: Have a Clearly Defined Plan 125 Rule #2: Avoid Asset Classes That Diminish Results 127 Cash--The Illusion of Safety 127 The Illusion of Gold as a Way to Grow Wealth 129 Rule #3: Use Stocks and Bonds as the Core Building Blocks of Your Intelligently Constructed Portfolio 131 Rule #4: Take a Global Approach 138 Rule #5: Use Primarily Index-Based Positions 140 Rule #6: Don't Blow Out Your Existing Holdings 140 Rule #7: Be Sure You Can Live with Your Allocation 142 Rule #8: Rebalance 143 Rule #9: Revisit the Plan 144 The Ultimate Rule: Don't Mess It Up! 145 Portfolio Example 146 The "I Want to Beat the Market" Portfolio 146 The "I Need 7 Percent to Hit My Long-Term Retirement Goal" Portfolio 146 The "Get Me What I Need for the Rest of My Life with the Least Volatility Possible" Portfolio 147 The "I Have More Money Than I Will Ever Need and I Want It to Grow with Minimal Volatility" Portfolio 148 The "I Have More Money Than I Will Ever Need, Volatility Doesn't Bother Me, and I Want It to Grow Along with the Market" Portfolio 148 A Path to Success: Intelligent Portfolio Construction 150 You're the One 151 Conclusion Let's Roll!! 153 References 155 Index 163
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