An Easy Way to Increase Your Returns Right Now

Steve McDonald
by Steve McDonald, Bond Strategist, The Oxford Club
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Editorial Note: When the market dipped last week, the permabears came out in full force. Many are now warning of a coming “earnings recession” (an idea Alexander Green touched on Friday). Our reaction: So what? At Investment U, we take a market-neutral stance. Meaning, we know that no matter which way the wind blows, there’s a way to play the situation - and prosper.

Of course, we also know it can be easy to get caught up in the day-to-day minutiae. (Which explains why the average investor has earned less than 3% annually over the past 20 years...) That’s why today we’d like to share some words of wisdom from Steve McDonald. As Oxford Club Members know, Steve has no problem telling it like it is. In this piece - which originally ran in Wealthy Retirement - he gives panicking investors the “slap in the face” they need. Enjoy.


Since August 24, the day the market dropped 1,000 points in five minutes, stocks have been treating us to daily thrills and chills.

And, if you have been following these almost constant ups and downs in your portfolio, you - and a whole lot of folks like you - have by now gotten that sick, awful feeling that comes with sell-offs.

Now, I could spend the next 800 words telling you sell-offs are expected and should be planned for, especially after the multiyear run-up we have been in since 2009. But instead, I’m going to share a technique that requires almost nothing on your part, but is proven to make you money. Stay with me...

We all know that, in investing, you have to ride out the rough spots to get to the good stuff...

I could show you all kinds of charts about how the market always runs up to new highs after down periods like this year’s.

But my decades in the financial advice and money management business tell me it won’t make any difference.

Once the market starts doing its numerical gymnastics - and it has been cartwheeling all over the street - there seems to be no power in the world that will keep the average investor in his investments. The fear of losing any more of his nest egg is too great and he will sell at a loss... again.

The Importance of Quality

Before I share this moneymaking technique that requires doing almost nothing, there is one big caveat you must understand.

To make this work, you must own quality: Companies that have long histories of increasing their earnings, revenues and dividends. Those will allow you to focus on the long haul and do something other than worry.

As a retired person, as someone planning to retire or as an income investor, this idea of quality should be obvious. You can’t get to retirement - or through it - by owning high-risk or even medium-risk stuff. Our days of speculative biotech investments, penny stocks and hunches are over. (At least I hope you know they’re over.)

Your investments must be on the safe side of the risk line.

The Technique

If you can work from that point forward, this technique will work. If not, get used to that sick feeling in your stomach.

This system, if you can call it that - it’s probably closer to a belief system - started to develop back in 1992. That was the first time I worked with fee-based accounts with my clients.

Fee-based means you are charged a flat percentage for trading and managing your account rather than commissions per trade.

A buddy of mine who had been working with fees for several months made a startling discovery. With a guilty look on his face, he said, “The less I look at the portfolios, the more money they make.”

And it was true!

Believe me, when we had to sell and buy stock to make a living, you can bet we looked at our client’s holdings a lot more often than when we were paid quarterly on a fee basis. With a set fee, all we might have done for a whole quarter was some hand-holding.

But this is not a pitch for fee-based investing. It is about looking less often at what you own.

The Long Term

Unless you just started investing today (which I know you did not), I’m sure you have heard the mantra of “time in the markets.” Time is the key to making money, not picking the right investment and especially not trying to time the market.

And looking at longer time periods of market activity really drives this point home.

On a day-to-day basis, since 1928, the market has been up 53% of the time. The median gain on up days has been 0.51%. On down days, it has been a negative 0.52%.

Not too enticing, I know.

But on a monthly basis over the same period, it has been up 59% of the time. And the positive-to-negative return spread moved apart, with a 3.1% median gain to a negative 0.27% median loss.

But here’s where my buddy’s idea of looking less often really starts to pay off:

If you ignore everything but annual numbers, the market is up 67% of the time on a year-to-year basis. And the median average gain is 16.8% versus a loss of 11.9%.

So, I have to ask. Why do you spend all day fixated on day-to-day changes? There is nothing to be gained by watching your portfolio daily, never mind the minute-to-minute worrying small investors do in a market like this one. At best, it’s a wash.

Volatility is smoothed out over months and years, not days and minutes. And if, based on daily activity, you chase this or any other market, you will lose.

How bad has the day-to-day guessing gotten in this recent sell-off?

The day after the 1,000-point drop - which, by the way, recovered by 500 points by the end of the same day - mutual fund investors withdrew the largest amount of money from stock funds since 2007: $19 billion.

The next two days were the largest two-day run-ups in the Dow’s history.

Believe me, guessing and worrying about day-to-day changes is a losing proposition. Always has been, always will be.

Get familiar with the history of fluctuations in the market and what always follows them: up markets.

Stop fixating on day-to-day changes. Leave your portfolio alone. Looking at it constantly or even daily will only cost you money.

And every time you get the urge to look at your holdings, go hit the ball. Tell your spouse I’m an expert and you have to listen to me.

Good investing,

Steve

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A Pick to Make Your Eyes Light Up

When markets drop, it triggers most investors’ natural inclination to panic. But successful investors’ eyes light up... because they know they’ve just been given an opportunity to buy value stocks at fire sale prices. In that spirit, let’s take a look at a recent pick from Alexander Green’s True Value Alert... International Business Machines (NYSE: IBM).

Yes, IBM. The decades-old chipmaker that’s been slipping since July. In a recent appearance on CNBC, Warren Buffett acknowledged the dip and said he could not be more delighted about his “losing position” in the company. Now this is your opportunity to get the stock for an even cheaper price than Buffett did.

Here’s an excerpt from Alex’s recommendation:

“Yes, the company has a long history of innovation with mainframes and personal computers. But today it is transforming industries and professions with data analytics, helping businesses and governments remake their IT departments for the cloud era, and ensuring that technology systems are not only faster and more efficient but far more secure.

“Information technology is one of the most dynamic and fast-changing industries in the world. And IBM is committed to high-value innovation, not product commoditization...”

Here are just a few of the bold moves the company has made recently:

  • Investing $1 billion to accelerate the commercialization of IBM Watson, a cognitive technology that processes information more like a human being than a computer.
  • Investing another billion dollars to create IBM Bluemix, its cloud platform for software developers.
  • Investing $1.2 billion to expand its SoftLayer cloud centers to 46 locations by the end of this year.
  • Further scaling up its global cloud business through new partnerships with SAP and Tencent (in China).
  • Forging a landmark partnership with Apple (Nasdaq: AAPL) to bring mobility to more enterprises and professions.
  • Making a strategic alliance with Twitter to bring an entire new category of big data to business.
Revenue at IBM hit $87 billion over the last 12 months. Management is earning a massive 95% return on equity. And the company is using its $8.76 billion cash hoard to buy back shares and increase its dividend yield.

- Alexander Moschina with Alexander Green

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