First of all, take moment and read what follows.  I’ll comment at the end.

In what may be a surprising twist at the end of a strong year in the market, Boston Consulting Group found that fully 46% of investors were pessimistic about equity markets for the next year. 

The reading is up from 32% a year ago, and just 19% in 2015. 

As global equity benchmarks have rallied, more investors also see the market as too expensive. 

Fully 68% of respondents said the equity market is “overvalued,” more than double the 29% of respondents who thought as much last year. 

And nearly 80% of investors describing themselves as market bears cited “overvaluation” as the reason for their market pessimism, the survey found.

So, why the title?

Because this report of the report makes NO attempt to define the words or terms that I’ve bolded.

Exactly who were the investors?

How did the survey define pessimistic?

Equity markets are defined as only U.S. markets, or just any market?

Too expensive as compared to what?

Overvalued means what?  Is it the same as too expensive?  I guess they don’t want us to know!!

Market bears would seem to mean pessimistic, but does it?  It would certainly depend on how the question was asked.

Without the clear understanding of the words used in the survey, and better yet a copy of the actual survey, how are you supposed to make heads or tails from what it presented?

I don’t think you can.  As I said, fake news!

We’ve been pounding this drum for quite a while now, so this should come as no surprise.

The Lords of Silicon Valley are supposed to be the drivers of our economy, and they certainly are this era’s economic rock stars.

But at least for now, according to this week’s Non-Farm Payrolls report, the lowly blue-collar folks out in “flyover country” are experiencing a renaissance in jobs that has been a long time coming.

Whether one credits Trump or not, the jobs growth is currently quite real in manufacturing – and, just for irony, note the decline in the high-tech “Information” category.

This is simply the reality that all of this is cyclical and positive activity in varying parts of the economy impact many other parts of the economy.

Do You Know These Common Sense Money Concepts?

If you don’t know the basics of financial planning, get started with these tips.

By Cameron Huddleston June 9, 2017

Whether you aspire to be rich or just want to stop living paycheck to paycheck, you need to understand basic money concepts. Unfortunately, essential financial terms and concepts often aren’t taught in school. So it’s up to you to learn them on your own.

To help, here are 15 money concepts you should know. Understanding these basics can help you avoid costly money mistakes and start getting ahead financially.

Know How Much You Make and Spend Each Month

Knowing how much money you have coming in and going out each month is the foundation to managing your money well.

“If you don’t know this by heart, then virtually every decision you make about your finances will be pretty much a guess,” said Charles Scott, president of Pelleton Capital Management, a wealth management firm in Scottsdale, Ariz.

Figuring out how much you make is straightforward: Check your pay stub or bank account to see how much is being deposited directly. To figure out where your money is going, you’ll need to review your bank and credit card statements. Scott recommended identifying these three categories of spending — fixed expenses such as rent, mortgages or car loans; variable expenses such as credit card payments and discretionary expenses such as entertainment, vacations and restaurant meals.

“Take the time to look back at what you’re currently spending, write it down, create at least the three main categories listed above and add it up,” he said. Then you’ll know whether you have more going out than coming in and what changes you need to make to your spending.

Create a Spending Plan

You’ve likely been told time and again that you need a budget. But budgets often don’t work because the focus is on cutting out things. A more constructive approach is to create a spending plan to plot where you want your money to go each month, Scott said.

You have to go through the exercise of tracking your spending. But the goal isn’t to pinpoint which expenses to eliminate. Instead, you should figure out what’s most important to you — saving for a vacation, early retirement, paying for your kids’ college — and then align your spending with what you value rather than blowing your money on things that don’t matter.

“As you do this, over time you will begin to see where funds are actually going and be much more capable of aiming those funds where you want them to go,” Scott said.

Don’t Charge More Than You Can Pay Off Monthly

If you charge more on your credit card than you can pay off each month, you’re not alone. Nearly 40 percent of Americans have credit card debt and possess a median balance of $2,000, a GOBankingRates survey found.

“While it’s fairly common for people to have credit card debt and lots of it, common sense dictates that you should only charge what you can afford to repay,” said Holly Johnson, author of “Zero Down Your Debt.”

If you carry a balance, you’ll end up paying more than the amount you originally charged to your card because you accrue interest on your balance. For example, if you have a $2,000 balance on a credit card with a 15 percent interest rate and pay just $50 per month, you’ll spend $790 in interest over the four and a half years it will take you to pay if off.

“Charge only what you can afford to repay if you choose to use credit,” Johnson said. “That way, you won’t wake up one day with a growing credit card bill you cannot tame.”

Know Why Your Credit Score Matters

Nearly 60 percent of Americans don’t know their credit scores, according to a survey by LendingTree. However, this three-digit number plays a big role in your financial life.

Your credit score matters because lenders use it when deciding whether to give you credit and the terms of that credit, such as the interest rate. A good credit score can help you get a better interest rate — which means you’ll pay less to borrow money. Insurers, utility companies, cell phone companies and landlords also look at your credit score to determine whether you’re a credit risk.

You can get your credit score for a fee from myFICO or from the three credit bureaus — Equifax, Experian and TransUnion. Or you can get a version of your score for free from a site such as Go Free Credit.

Understand Your Credit Score

If you want to improve your credit score, you need to know what factors impact it. However, a survey by GOBankingRates found that 40 percent of respondents might not know all the factors that can affect their scores.

The commonly used FICO credit score ranges from 300 to 850. It’s calculated from five factors on your credit report: your payment history, the amounts you owe, how long you’ve been using credit, the types of credit you have and whether you’ve opened new credit accounts recently. You can see where you stand in each of these categories by getting a free copy of your credit report from AnnualCreditReport.com.

Negotiate Your Pay

A basic concept you should grasp early on is that if you want to earn more money, you need to be willing to ask for more. However, most people don’t do this. PayScale’s Salary Survey found that 57 percent of workers have never negotiated for a higher salary. However, the majority of people who do negotiate their salaries get pay increases.

Sites such as PayScale, Salary.com or Glassdoor can help you find the average pay for your position. You can use that information, as well as what you bring to the job, to negotiate a better salary if you’re not being paid what you’re worth.

Have Six Months’ Worth of Expenses in an Emergency Fund

“One common sense money concept that I give often, but many people do not follow, is to have an emergency fund equal to six to nine months’ worth of living expenses,” said Jamie Pomeroy, Minnesota financial advisor and creator of personal finance blog Financial Gusto. Having that much money set aside will help you get through a job loss or other financial emergency. The key is to have the money in a separate account.

“I often hear, ‘My Roth IRA is my emergency fund,’ or, ‘I have cash in my brokerage investing account,’” Pomeroy said. However, cashing out investments or a retirement account can trigger a tax bill — which means you’ll need more money to pay taxes in addition to the amount you need to cover an emergency.

Instead, you should open an interest-bearing savings account and set up automatic transfers from your checking account each month to build your fund. Then the money can be easily accessed when an emergency arises.

Save 15 Percent of Your Income for Retirement

You know you need to save for retirement, but you might wonder how much to put aside. Financial experts typically recommend setting aside 15 percent of your income annually.

“If you start crunching the numbers and factor in modest returns and employer contributions on 401ks and similar employer-sponsored retirement plans, that usually seems to be enough for people to save long term and be comfortable,” said Josh Brein, a Washington-based financial advisor and founder of financial planning blog The Art of a Plan.

If you’re saving anything for retirement, you’re ahead of many people. GOBankingRates’ 2017 Retirement Savings survey found that a third of Americans have $0 saved for retirement. However, you should aim to save 15 percent annually — even if that means starting small and increasing the amount you set aside each year.

It’s Easier to Reach Savings Goals When You Start Early

Time is on your side when it comes to saving money for retirement or any long-term goal. That’s because even small monthly contributions to a retirement account can grow to large amounts over time, thanks to the power of compound interest.

For example, you could have $1 million by age 65 if you started investing $158 per month at age 25 and earned 10 percent annually. If you waited until age 35 to start saving, you’d have to invest $442 per month with a 10 percent annual return to have $1 million by age 65.

Give Your Savings a Raise if You Get a Raise

If you get a raise, it’s easy to increase your lifestyle to match your higher income level. But you’d be better off financially if you increased your savings with every raise, Brein said.

“If you get a 5 percent raise in pay, you should save 5 percent more in your savings or retirement to match that raise,” he said. So if you’re saving $100 a week, you would boost that amount to $105 if you got a 5 percent raise. This way, you’ll have a higher likelihood of being able to live the lifestyle you want when you retire,” he said.

Learn the Basics of Investing

As an entrepreneur and best-selling author Tony Robbins has said, investing can put you on the path to wealth. Even if you don’t earn a lot, investing your money can help you become rich. That’s why it’s important to understand the basics of investing.

One of the key concepts you should understand is the importance of diversification — investing your money in a variety of assets.

“Having your assets in more places than less offers a degree of protection from taking big bets on a limited number of selected investments,” said Michael Kay, President of Financial Life Focus, a financial planning firm in Livingston, N.J. In other words, if you invest all of your money in the stock of one company, and the company goes bankrupt, you’ll lose all of your money.

Life Insurance Is Crucial

People often don’t understand the reasons they might need life insurance, said Chris Huntley, president of Huntley Wealth & Insurance Services. “If you’re not sure, don’t be embarrassed,” he said. “It’s amazing how many people get this wrong.”

To find out if you need life insurance, ask yourself how the people who depend on you financially would get by if you died.

“If the answer is that they’d have to move, take a second job or ask the extended family for help, you’re probably a candidate for life insurance,” Huntley said. “Life insurance fills in the financial gap left by a loss of life. If you’re not there, life insurance steps in to help pay the bills, the mortgage or rent or to help pay off debt.”

Know How Much Life Insurance You Need

It’s one thing to understand that you need life insurance. It’s another to know how much you need because, if you’re not sure, you could be talked into buying an expensive policy that’s not right for you.

“Knowing this, you won’t be fooled into buying life insurance that will cover you when you’re 80 or 90 when you probably will no longer need coverage,” Huntley said. “And you can say, ‘No, thank you,’ to the agent who pitches you a life insurance policy that ‘grows in cash value’ or that you can ‘borrow from’ or ‘supplement your retirement with.’”

For most people, a 20- or 30-year term life insurance policy is ideal, Huntley said. That means the policy will pay a benefit if you die within 20 or 30 years of signing up for coverage. A term-life policy costs less than a whole-life policy that provides coverage for your entire life.

You Need an Estate Plan Even if You’re Not Rich

Estate planning isn’t just for the old, rich or famous. All adults need the proper documents to prepare for the unexpected and make things easier for the people they leave behind when they die.

For example, if you don’t have a will, the state — through the court system — will decide who gets your assets and who will raise your children. You should also designate a medical and financial power of attorney and have a living will. These documents allow you to name someone who will make healthcare and financial decisions for you if you are unable to do so yourself. If you have a serious injury, go into a coma, suffer from dementia or other such events, it will allow you to specify the treatment you would or wouldn’t want to keep you alive.

Building a solid estate plan allows you to spell out your wishes for both life and death. Ideally, it will help head off disputes over your care if you can’t make decisions on your own, and ensure your assets go to the people you care about after you die.

How to Choose a Financial Advisor

Even if you understand basic money concepts, it can be hard to create a financial plan on your own. However, the concept of paying someone to help manage your money might seem foreign to you. Even more confusing can be finding the right person for the job. That’s because even the term “financial advisor” causes confusion, Kay said.

“The title can mean anything and should largely be ignored until consumers can determine if the person wearing the title is a stock broker, insurance agent, bank employee selling annuities or a financial planner who charges a fee for advice,” he said. The key is to find a financial advisor who acts in your best interest rather than someone who just wants to sell you products to generate a commission.

In Deloitte’s study, just 42% of consumers surveyed now view 3-4 day shipping as “fast”, whereas almost two thirds of consumers considered 3-4 days to be “fast” just last year!  Amazon is now upping the pressure on traditional outlets even more, as it begins rolling out same-day delivery to more markets.

“I hate it!”

Both are emotional comments about almost anything, and they certainly carry over when it comes to investing. After all, we’re only human.

So why might this be a good time to have a discussion about this topic? The first two months of 2016 have been interesting, to say the least when it comes to investing. The major indexes are all negative so far this year, as this is written. 2015 wasn’t so great either. So, how should you deal with this current uncertainty? Before we arrive at an answer to this, it would be helpful to look at how we humans emotionally react to the up and down movements of the investment markets. As a believer that a picture is worth a thousand words, let’s examine the picture below:

As the markets move up, even though it’s never in a straight line, we go from optimism to euphoria as the maximum potential risk level is reached. We now truly believe we are a genius! What could possibly go wrong when we’re so smart?

So, as the markets move down, as they all do at some point, our emotional state changes and we try to justify why we couldn’t possibly be wrong. And as the slide continues, our emotions get stronger and stronger as fear kicks in more and more. And more often than not it’s more about being wrong, not just the value we might be losing. How could we suddenly have gone from being so smart to being so dumb?

And invariably at the bottom of the market, our emotions have become so overwhelming that we convince ourselves that we really don’t know anything and now it’s time to get out. Or we might think this whole investment process if rigged against us, since it couldn’t be possibly our fault. This happens at precisely the most opportune time to be sure and be in the market.

But before we can muster the emotional fortitude to jump back in, our depression needs to wane and hope, relief, and optimism need to take over again so we can decide to invest now.

Understanding how this cycle repeats itself could make you a better investor, but there are no guarantees of that. You also need to learn to not let emotions have much of any part of the investing process. So, how can you accomplish this?

You need a plan.   A logical plan based on fact, not emotion. You need to think like Mr. Spock in Star Trek.

We’re not advocates of simply buying the whole market and holding on forever. Yes, over a long time the markets inevitably go up, but your time line may not be a long time. We have never bought any investment for a client that we expected to hold forever. Nothing works forever. There have been multitudes on successful investors over the years that have lived by the mandate that you have to be willing to buy when everyone else is selling and sell when everyone else buying.

And if this feels emotionally difficult to do, that is exactly why we need a logical plan of what to buy, when to buy it, when to sell it, how much of it to buy, and what are the key factors to go into determining all of these things. This is a subject intended for a future article, so stay tuned.

Hopefully, this discussion helps to explain why we, as humans, react the way we do, and why this came be a negative when it comes to investing. Negative in the sense that we may be buying high and selling low because our emotions tell us to do it that way, but also negative in the overall emotional turmoil it can cause.

Do yourself a favor. Understand what’s going on in your heart and your head, and have a plan to let logic rule the day, especially when it comes to investing.

Isn’t it nice to have the answers before the question is asked? Of course it is. That’s easy!

So how would this work when it comes to investing? Someone much wiser than me once said that if you don’t know where you’re going, any path will get you there. This couldn’t be more true than when it comes to investing. And often it will be a lot more dangerous. So there’s never a bad time to become wiser about your investing process. If you learn something today that you didn’t know yesterday, and it will help you tomorrow, is there ever a bad time to learn that? Not really.  So, if you start the process by knowing the answers to the 6 questions that follow, the investment risks should be greatly reduced. You have to understand that the risks cannot be eliminated, but they can be understood and managed to some degree.

So what are the 6 investment questions?

1. What investment – stock, mutual fund, exchange traded fund – do you want to buy?
2. Is now a good time to buy it?
3. How much of it should you buy?
4. What do you do with it if it’s a winner?
5. What do you do with it if it’s a loser?
6. What do you do with it if it’s simply a laggard?

Let’s take them one at a time.

What to buy?

That’s really up to you and not the focus of this particular article. Whatever your process of selection, we’re going to assume you have found something you feel good about for the right reasons. We certainly have a very clear process for selecting the investments we choose for our clients and you should too.

Is now a good time to buy it?

That’s a tougher one to answer. It will likely depend on several issues: Is the overall market positive or negative? Is the sector or asset class you are looking at positive or negative? Is the price attractive? Based on what criteria? The list of considerations may seem daunting, but all of these questions are important to understand before investing.

How much should you buy?

This has proven to be the most misunderstood question that we’ve come across over time, and we’ll provide a more detailed answer in a moment.

What do you do if it’s a winner?

Do you have a specific plan of keeping it or selling it at some point? Successful investors have this determined before they buy.

What do you do if it’s a loser?

Not all good ideas work out as planned. You need to know at what point you will dump a loser, and you need to know that price point before you buy it, otherwise all of this becomes a guessing game.

What do you do if it’s simply a laggard?

This is something that most people we’ve had this discussion with have never thought about. If your dollars are just sitting there in a lagging investment, are there other investments that would be more productive or have more potential? Again, having a process to determine this in the beginning will result in better investment outcomes.

How much to buy? (Take 2)

We’re now back to the issue of how much to buy. This is by far the most difficult question. And one that rarely has a satisfactory answer in our opinion. Rather than simply picking an arbitrary percentage of your overall portfolio or an arbitrary number of shares, why not base it on how much risk you want to take with that specific investment.

Let’s examine this process.

We’ll assume you have a $500,000 portfolio and are willing to risk 1% of that on any given investment choice. That equals $5,000 of risk. Let’s say the stock is selling for $40 per share and you have determined that if it falls to $35 you will sell it because it’s a loser as discussed above. You now have $5 of risk – the current price minus the stop loss price – so divide the risk of $5 into the portfolio risk of $5,000 and you get 1,000. You buy 1,000 shares.  You have taken 1% risk to buy the stock and it represents $40,000 of value, or 8.0% of your portfolio. Does that seem like too high of a percentage? Why? You have clearly defined the amount you are willing to risk, and logical math does the work. There is nothing arbitrary here. If the price falls to $35, you sell it. It’s a loser. If the price moves up to $50, things are looking good and you simply move up your stop loss price up to $45, which will now represent your 1% risk factor for this specific investment.

You now have the answers to all six of the investment questions asked. What, when, how much, as well as what to do if it’s a winner, loser, or laggard. As stated in the beginning, isn’t it nice to have the answers before the question is asked. This process gives you answers and should also give you better investment results without the worry of not knowing what you don’t know.

“Crucial to virtually any investment strategy is knowing how much risk is involved when the investment methodology is put into practice. We know it’s a dark and spacious world out there, this concept of risk. So we channel “Star Trek,”—Boldly going where no man has gone before—to help you navigate the outer reaches of “investment risk.” Not only is it complicated, it’s also misunderstood—and rarely explained.

When explaining risk, the industry standard is to use terminology that assumes everyone sees the same things, interprets what they see the same way, and understands all the words that go along with it. Rarely will you sit with an advisor who will take the time to explain risk variables and in what context they might be used. Granted, those questions aren’t often asked by you. We don’t think you should have to ask. Whether you’re a fan of Mr. Spock or Captain Kirk, we just want to make sure we’re all talking about the same show.

Demystifying Risk

Here’s where the confusion may rest…the many possible definitions of “risk”:

• Market risk—The inherent reality that investment markets go up and down.
• Timing risk—Being in or out, either at the right time, or, more importantly, at the wrong time.
• Purchasing power risk–Equates to inflation. When there is inflation, and that’s virtually all of the time, everything will cost more in the future than it does today
• Credit risk—Relates to investment bonds, CDs, annuities, and so forth, all fixed-income purchases, to which, basically, you are lending your money. Upon maturity, the end of a pre-determined term of the loan, the holder of your cash pays interest on that loan and returns the initial investment. The risk is whether the entity will actually be able to repay the loan or not.
• Liquidity risk—The ability to get out of an investment when you want to, hopefully, without penalty. Your home has limited liquidity; it could take quite a while to sell before you can liquidate your asset. Your 500 shares of IBM stock have instant liquidity while the stock markets are open. Your private placement natural gas limited partnership may have no liquidity until the general partner decides so.
• Maturity risk—Those fixed income investments that pay you back when you make the request. If you want to fund a special event three years from now, you want to set the maturity date appropriately. Or, if you are just investing for income, you might want to spread out maturities over a span of time to take advantage of rising interest rates. Similar to “reinvestment risk.”
• Call risk—Related to bond trading. The issuer “calls” the bond to buy it back earlier than the maturity date would normally allow. By doing this, you risk losing cash flow from the bond. Once it’s “called,” that is, the transaction is completed, the income stops.
• Reinvestment risk–Picks up where call risk leaves off. You now have your money back from the bond and may need to reinvest it. Interest rates, up or down, now impact the income you will receive from the reinvested monies.
• Transparency/disclosure risk–Linked to knowing what you really own. Is it really what you think it is?  Do you know what’s in the mutual fund you own? The published data may be months old.
• Geo-political risk–Self-explanatory. Governments all over the world can do things that are real stupid, yet have significant impacts of the global investment markets. It might be financial in nature, or it might be military aggression, but we can’t always see it coming. This is an area that becomes more and more fraught with risk all the time, and we better be ready to react when it does.
• Longevity risk—Pertains to the fact that we are living longer lives. We ask, “Will I outlive my money?” Longevity can be very difficult to quantify with any degree of certainty, since no one knows what the future will bring, but you may need to ask yourself, “Have I planned for a life beyond 100 years of age?”
• Sequence of return risk—Also an aging issue focusing on what would happen if you chose to retire right as the investment markets take a steep nose dive. You would be taking money from your accounts at a rate that might not be supported by the newly reduced values of those accounts. This—and taxes—could take a big bite out of your account balance, leaving less for future income needs.
• Sequence of consumption risk—Based on how much you spend and when, and whether it was planned for or just happens. There is also the likely scenario that more will be spent in the earlier years of retirement than later on, as folks enjoy the fruits of their labors. The major exception to this centers around the inevitable increase in health care cost as you get older.

Undoubtedly, there is more to say about “risk” but…what people are really most concerned about is this: “Don’t lose my money!”  And while that sounds simple, as you can see, there are many issues that need to be considered.

Knowledge is power, and we hope this list of risk issues is powerful information for you.”

No, 93.6% of your investment returns are not due to the asset allocation of your portfolio.

The purpose of this article is not to say that the concept of asset allocation is flawed or anything like that. The most important decisions in determining an investment portfolio are what asset classes to use and what percentages to put into each asset class. Diversifying your funds among different assets among different kinds of investments potentially reduces your overall risk because different investments should act differently at different times for different reasons. This is a very sound and accurate description of the investment world.

What I want to call your attention to when it comes to the idea of asset allocation is a commonly used—actually, misused—statistic. You have very likely seen somewhere in marketing materials out there that 93.6% of the investment returns you get are due to the asset allocation of your portfolio.

This is simply not true.

Why am I writing about it now? Because in the last couple of months I’ve seen this misconception, or misunderstanding, a couple of times in some marketing materials that have come my way, and I wanted to share with you what Paul Harvey would call “the rest of the story.”
The basis for this misunderstood issue comes from a 1986 article in the Financial Analysts Journal, titled “Determinants of Portfolio Performance,” authored by Gary Brinson, L. Randolph Hood and Gilbert L. Beebower. The major tenant of the paper was that asset allocation mattered more than anything else—more important than even the specific stock or bond security selection or market timing.

The study looked at several specific pension funds over a specific time frame and reported on the variations in portfolio returns. It found the key driver of those returns was the choice of the asset classes used and the proportion that went into each asset class.

Here’s where things get a bit confusing, and it stems from how the investment industry decided to use this information. Having been in the industry for more than 30 years, I’ve seen it time and time again. The marketing material will state that 93.6% of the return of your portfolio will come from the asset allocation of that portfolio. They have extrapolated the results of the Brinson, Hood, Beebower study and asserted that it applies to any and all portfolios over any time period. However, that 93.6% came only from the specific pension plans studied for that specific time frame, not any other portfolio over some other time frame.

As the risk of being really picky here, this is where the marketing departments of the financial services companies have gone too far. It’s really simple to trot out the 93.6% number and make people think that the only key thing is asset allocation. Way too simple. And way too misleading. But it makes for great marketing material.

This comes full circle in an article published in March 2006 in Wealth Manager magazine, written by James Picerno, in which he interviewed Gary Brinson about his study results from twenty years before.

What did the author hope you would understand?

Summarizing the research, Mr. Brinson stated that deciding what asset classes to use and what percentages to use in those asset classes would have the biggest impact of the performance of the portfolios studied, and that those conclusions have stood the test of time.

Mr. Picerno then asked “Is there any particular misinterpretation or misuse that you find especially annoying?”

Mr. Brinson replied, “There’s one quote that I see periodically. Let’s say a portfolio had a return of, say, 10%, and someone will say, ‘93.6% of the return is due to asset allocation.’ That’s not true. That’s not what the paper said; that’s not the application of the paper. First of all, it didn’t apply to an individual portfolio; it applied on average to the portfolios we were examining. The number is an average number, not a number that applies to every single portfolio.”

Enough said?

So, please be aware of the misuse of the 93.6% statistic or any other percentage used in the same manner. If what you are reading or what is being presented to you is saying that the overwhelming percentage of investment returns is coming simply from asset allocation, know that the information is being misinterpreted or misused.

Take it from the author, Gary Brinson: this is not accurate. This is not a true statement. Be informed and be aware.

It may be a sound investing strategy, but it loses power over time. For the last 18 months or so the investment markets have been up and down and up and down, and are now pretty much at the same levels they were 18 months ago. A lot has happened, but nothing has happened.

It’s at these times in the longer-term investment cycles that the idea of dollar-cost averaging seems to be a timely topic. So let’s take some time to analyze just how and when this idea works, and perhaps when it doesn’t work as well. You might want to see how this will impact you over time.

Dollar-cost averaging is a fundamental investment concept that enjoys general overall acceptance. Here is a basic example of how it works:

If we invest $100 every week, say on each Wednesday, into a mutual fund (understanding that each week there will be a different price for the shares of that fund), we know that if the price is up, we’ll buy fewer shares for that $100. If the price is down, we’ll be able to buy more shares. If the price week one is $14.56 per share for the fund, we buy 6.868 shares. Next week, the price is $14.02, and we buy 7.133 shares—more shares because the price was down. If in the third week the price has jumped up to $15.12 per share, then our $100 buys only 6.613 shares.

That’s a total of 20.614 shares for our $300, or an average of $14.55 per share. That’s exactly how it works. Your methodical weekly investment buys more shares when the price is down and fewer shares when the price is up. It averages out over time. So far, so good.

Virtually all of the conversation about this concept seems to end here. It is assumed it doesn’t matter if the price goes up or down, that it will average out over time. Mathematically, that is correct.

Yet, over time, it will matter more and more what the price is. The basic assumptions of dollar-cost averaging will matter less and less.

Why? As noted above, we add $100 each week to the investment. That second $100 is a 100% increase above the initial investment. That’s great. But by week three, that $100 is only a 50% increase. Week four: it’s only a 25% increase. And so on.

Each week’s investment becomes a smaller and smaller percentage when compared to the overall account value. After one year, you have invested $5,200, and your 53rd weekly investment of $100 equals only a 1.9% addition to all that you have invested up to that point.

This is not a bad thing. Investing is great. Consistent investing is great. But we now need to pay attention to the value of the total account, as price matters more and more with each weekly purchase. Of course, lower prices benefit us in the beginning since we can buy more shares. But continued lower pricing means the overall account value is also lower. That $100 weekly addition becomes less and less meaningful.

What you want is increasing prices, even if it means you buy fewer shares. What you’re after is greater value, and that only comes with an increasing price of the shares of the fund. If the value isn’t increasing, there may be no need to hold on to the investment. Or perhaps you start looking for an alternative choice for your investment dollars.

Yes, dollar cost averaging is a sound principal, especially in the beginning, but don’t be lulled into ignoring its diminishing impact over time.

It may well be that the common wisdom is simply inapplicable now, as we are in a condition never before seen: widespread negative interest rates around the world (which also tend to hold down interest rates in the U.S.).  In this environment, all the old relationships and expectations may have to be scrapped as we work our way through this unprecedented circumstance.  Here is a table from Pension Partners illustrating how widespread across both countries and maturities that negative interest rates have become.  Note that the U.S. is the odd man out among the countries shown, having no negative interest rates at any maturity – yet.

A couple of comments here from me:

“Common wisdom” may just be an oxymoron when it comes to things financial.
 
“Predicting deflation/predicting inflation” – nothing “predicts” much of anything.

Let’s just see  how this plays out…..patience is a virtue here.