Dollarlogic : a six-day plan to achieving higher investment returns by conquering risk

182 Pages·2016·3.97 MB·English

by  Martin

Praise for Dollarlogic
Andy Martin takes a difficult subject like asset allocation and risk reduction, and
offers practical, sustainable, and compelling advice for investors old and young.
While people often understand the concept of risk in their everyday lives, as
investors they often get it completely wrong, focusing on short-term performance
or mistaking short-term price fluctuations for long-term risk. Andy Martin’s
practical advice and entertaining anecdotes make for a good read, one that can
be beneficial to both investors and financial advisors.
Jack Tierney
Executive Director, Invesco Unit Trusts
Discard the time-worn admonition that the only path to higher returns is through
higher risk. As Andy Martin admirably explains, successful investing—achieving
one’s financial goals—requires lowering one’s risk. And, unlike many human
endeavors, you can get better at investing, even as you age. You don’t have to
agree with everything Andy says, but you will be well-served if you follow his
recommendations about key topics such as diversification, why you must divorce
your emotions from your investment decisions, and the value of a good financial
advisor.
Robert Huebscher
CEO, Advisor Perspectives;
former president and CEO, Thomson Financial
What is investment risk and why do we automatically assume that it always leads
to reward? This book answers those crucial questions. It also effortlessly
assassinates populist conventional wisdom. Open any page of this book and you
will be simultaneously educated and enlightened. Both individual investors and
financial professionals will greatly benefit from Andy’s wisdom.
Ron DeLegge II
Founder and Chief Portfolio Strategist, ETFguide.com
Andy Martin has a gifted way with words and advice when it comes to the
fundamentals of investments and investment strategies. Dollarlogic is a book
that investors of all ages and sophistication levels can benefit from.
Susan Woltman Tietjen
Chairman & Chief Executive Officer, Girard Securities, Inc.
Andy Martin’s book is highly enjoyable and readable for the individual investor
and investment professional. He provides a unique perspective of profitable
investing that we can all learn from.
Victor Ricciardi
co-editor of the book Investor Behavior: The Psychology of Financial Planning
and Investing
Andy Martin presents some very useful investing advice, such as the shocker that
risk—however measured—does not buy you higher returns. Like Odysseus tying
himself to a mast to avoid the tempting Sirens, we benefit from anticipating our
biases doing simple things like outsourcing our investment tactics. Most people
who are good at making money are inefficient investors, and would be better
served by the few principles covered in this book.
Eric Falkenstein,
PhD, Portfolio Manager and author of The Missing Risk Premium
DOLLARLOGIC
~
A Six-Day Plan to Achieving Higher Investment
Returns by Conquering Risk
~
By
ANDY MARTIN
Copyright © 2016 by Andy Martin All rights reserved under the Pan-American
and International Copyright Conventions. This book may not be reproduced, in
whole or in part, in any form or by any means electronic or mechanical,
including photocopying, recording, or by any information storage and retrieval
system now known or hereafter invented, without written permission from the
publisher, The Career Press.
DOLLARLOGIC
EDITED BY JODI BRANDON
TYPESET BY EILEEN MUNSON
Cover design by Howard Grossman Printed in the U.S.A.
To order this title, please call toll-free 1-800-CAREER-1 (NJ and Canada: 201-
848-0310) to order using VISA or MasterCard, or for further information on
books from Career Press.
The Career Press, Inc.
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www.careerpress.com
Library of Congress Cataloging-in-Publication Data CIP Data Available Upon
Request.
CONTENTS
Executive Summary:
Dollarlogic in One Page
Foreword by Arthur B. Laffer, PhD
Preface
Introduction
THINK
Day 1: Risk ≠ Reward:
Understand Risk: It Is Not What You Think
Day 2: Stocks Are Less Risky Than Bonds:
Your Objectives, Not the Investment, Determine the Investment’s Risk PLAN
Day 3: Seek Lower Returns:
Reducing Losses Is More Important Than Increasing Returns Day 4: Predict
Yourself, Not the Stock Market:
Establishing Your Goals Is More Important Than Guessing the Market EXECUTE
Day 5: Investments Don’t Make Money—People Do:
Hiring an Advisor Is the Best Investment Plan You Can Make Day 6: Do Not
Chase Returns, Chase Odds:
Diversify—But Diversify Wisely and Widely
Epilogue:
On Money and Happiness
Chapter Notes
Index
Acknowledgments
About the Author
EXECUTIVE SUMMARY
Dollarlogic in One Page
You have heard it your entire life, and it is wrong. Risk does not equal
reward. If it did, why would you wear a seat belt?
What is risk? Risk is not only the worst that can happen, but what is most
likely to happen. If negative results equal higher risk, positive results equal
lower risk.
Because stocks are likelier to earn higher long-term returns than bonds (4%
yearly average for 40-year rolling periods) stocks are less risky than bonds.
Short term, however, stocks are unpredictable; math is against you. A loss of
10% has more impact than a gain of 10%, so the key is to reduce losses, not to
increase returns.
Does that mean that as a stock investor you now have to predict the markets?
No. No one can do that, not even the experts. You only have to predict yourself,
such as when do you want to retire, what are your objectives, and how much
income do you need? Success or failure, therefore, is dependent on you, not your
investments.
So, what should you do? Do as the ultra-wealthy do: Hire an advisor to help
you predict you and your future, and diversify properly. Do-it-yourselfers have
only a map; those with advisors have a GPS—they know where they are on the
map.
Result? Your future is not dependent on chance or luck because you have
systematically reduced risk with diversification and dedicated professional help.
Managing risk in this new, more productive way is what I call dollarlogic.
FOREWORD
Risk equals reward. Well, maybe not. Andy Martin makes compelling
arguments here that could change your mind.
The good news is that if you agree, you may be on your way to less volatility,
less disruption from your monthly routine of opening your brokerage statements,
but more restful sleep. However, his lower-your-risk strategy is not a call to
surrender but a call to measure risk by probable outcomes instead of by
infrequent negative events, which is how risk is usually defined. Therefore, if
you increase your chances of reaching your investment goals, you are reducing
your risk—even if this means owning more stocks. I’ll bet you have never
thought of risk this way.
Andy quotes approvingly Shelby Davis, who said, “You make most of your
money in a bear market; you just don’t realize it at the time.” Warren Buffett
might have said the same. I would agree with both. It is not just that you buy
low; it is also that you do not sell low. Why not? Because the stock market is
nothing to fear. You don’t move out of your house if real estate values fall.
Andy imagines your investment portfolio as your virtual home that provides
warmth, protection, security, and stability. Perhaps you should think of this the
next time you are ready to jettison a blue chip stock or well-managed fund the
next time it drops in value. Those drops in value are often temporary. You make
them permanent when you sell.
Andy has a contrary way of thinking. I have a contrary way of thinking. Most
of my professional life I have been pleasantly surprised to discover that thinking
differently and acting differently yields positive results, as long as you have the
data to back it up. For example The Laffer Curve is contrary to conventional
thinking. No one would guess that lowering taxes actually increases tax
revenues. However, the data back up this claim and provide a reminder to think
differently.
One way to make negatives smaller and to achieve potentially higher returns
over time is by diversifying. You may not be surprised to learn that widely
diversifying your portfolio into stocks, bonds, cash, real estate, and commodities
could lower your volatility. However, you will be surprised to see that in the
past 45 years this well-diversified portfolio that Andy describes had a higher
value than the S&P 500 roughly 70% of the time. In other words, it lowered risk
and increased return.
and increased return.
Additionally, you may be surprised to know that as we sit at base camp at
what may be a long upward interest rate climb that Andy’s research indicates
that for long-term investors rising rates are not to be feared either. Again, he
shows that broad diversification is a timeless remedy for rising rates.
We said, in our prologue to our book, An Inquiry Into the Nature and Causes
of the Wealth of States: How Taxes, Energy, and Worker Freedom Change
Everything (John Wiley & Sons, Inc., 2014), “To us, a small truth is preferable
to a great falsehood, and yet others would seem to prefer complex error to
simple truth.” I see herein many small truths.
Over my long career I have uncovered perils and opportunities worldwide
around every corner of the financial markets. Similarly, Andy Martin’s
observations will read as travelogue of a memorable and fruitful journey.
Arthur B. Laffer, PhD