Here’s a radical thought: men and women are different. Not in terms of strength, temperament, intuition, or any of those things (not for the purposes of this article, anyway). They’re different in terms of how they invest.

Which gender do you think gets better returns in their investment portfolios, men or women? Most men would guess they would win this battle, and a lot of women would agree with that conclusion. But don’t worry gals; all is not what it seems to be! Finance professors Brad Barber and Terrance Odean have found that women’s risk-adjusted returns beat those of men by an average of about one percentage point annually. In short, women trade less frequently, hold less volatile portfolios, and expect lower returns than men do. Married men trade 45 percent more than their spouses, while single men trade 67 percent more than single women. While both men and women reduce their returns by trading, married men reduce their returns by one percent while single guys reduce theirs by almost one and a half percent.

Men are testosterone driven, and it’s important to them to beat the other guy (in this case the market) and, of course, brag about it. Behavioral finance researchers have coined this behavior as overconfidence. Women, by contrast, put safety first. Women are more inclined than men to wear seat belts, avoid cigarette smoking, and get regular medical checkups. Women are less afflicted than men by overconfidence or the delusion that they know more than they really do. And they’re more likely than men to attribute success to factors outside themselves, like luck or fate. To quote the old Harry Bellefonte song, “Man Smart (Women Smarter)!”

Other studies have shown women tend to feel inadequate about their investment acumen. They often feel that they don’t know all the technical language of the investment world, and they don’t know how to use the data to project market directions. Don’t worry gals because no one can. Memo to men: your household’s investment portfolio will be less risky and more diversified if your wife helps manage it. She will share in what comes out of that portfolio down the road. Shouldn’t she share in what goes into it? Chances are, her ideas and emotions will complement yours, and you will both could end up wealthier.

Trading advertisements play to our hopes and fears. That is, people hope to win the investment sweepstakes and fear being left behind. The online brokerage industry spends hundreds of millions of dollars trying to persuade you that trading is fun and profitable. Studies show this not to be true. The latest foray from retail brokerage houses is to offer the do it yourself investor’s access to currency trading through the Forex markets. Not only is currency trading very complex, but it has historically been the domain of large, specialized institutions. That said, more often than not, you will be trading against professionals such as George Soros instead of an amateur trader such as yourself. It’s almost no different than your playing tennis against a masked, unknown opponent such as Rafael Nadal. What are the possibilities of you or me winning either battle?

My last two blogs have had several common threads, but the over arching theme has been how emotions, especially fear and greed, undermine even the best of investment strategies.

Imagine you are in a movie theater watching the latest Indiana Jones movie. Indiana is in a cave, searching for lost treasure with a male sidekick and, of course, a beautiful female grad student.  Suddenly, the ground gives way and Indiana’s sidekick falls into a bottomless pit, screaming all the way to his death. Trying to save herself, the young woman grabs a vine dangling over the abyss. But, her weight is causing the roots of the vine to pull out of the ground. Beads of sweat are forming on her brow and her eyes are wide open with fear.

 The scene is so realistic that we are on the edge of our seats, and her fear becomes our fear. This collective feeling of fear is ultimately resolved when Dr. Jones throws the woman a lifeline and pulls her to safety.

Throughout the film several more brushes with death evoke the emotions of fear and panic; various other escapades elicit emotions such as greed and lust. In the end it was worth the emotional roller coaster ride because our hero, Indiana Jones, and his love interest find the treasure they were searching for – the proverbial pot of gold. As with any good adventure film, we not only share the same emotions as the characters, but feel the same safety that they do.  The difference is that ours is the safety of knowing we are in the safe environment of the movie theater.

Investing is not all that different from experiencing a scary movie or being cornered by a predatory wild animal.  The difference is that stocks and bonds are inanimate objects which pose no real threat to our physical well being. Unfortunately, we often react to investing as if our life is on the line evoking a caveman like reaction of flight or fight. If a Saber-tooth tiger is about to attack you, an appropriate action would be to fend it off with your spear. If you don’t have a spear the next best thing would be to high tail it out of there and live to fight another day.  Of course, stocks and bonds will never attack us but our inner caveman begs to disagree.

Have you ever felt as if you were investing in a sure thing and put just about all your money into investments such as Internet stocks, Real Estate, or Gold, etc? Have you ever felt, even though you were diversified, that during a market downturn your money was worth zero dollars?  Did you sell all your Municipal Bonds last spring in reaction to Mary White’s “massive muni bond defaults” announcement on 60 Minutes? These are all Caveman Feelings and reactions. In essence, money is a replacement for the Caveman’s shelter, firewood, meat and fur. If these essential elements are taken away from him the caveman is going to die. To be a successful investor modern man must not let caveman feelings and reactions win.
Even though the investment research company, Dalbar, doesn’t discuss Caveman feelings, their studies have consistently shown how emotions sabotage the average investor’s hopes, dreams and aspirations. Just as fear of danger would have kept Indiana Jones from acquiring his pot of gold, fear of losing money can keep modern investors from making money via investments – achieving their pots of gold. The twenty-first century is here.  It is time to turn our backs on Caveman feelings and start to grow our twenty-first century wealth.

On the last blog we discussed the fallacy of market timing and the detriments of emotional investing. So in crazy times like we are currently experiencing, what are investors supposed to do to protect themselves? My first suggestion is “Know Thyself”. In other words how much, expressed in a percentage of your assets, can you tolerate loosing?  This process starts with a mixture of stocks and bonds. A conservative portfolio will be a 20/80% stock bond mix and an aggressive one will be the opposite, a 80/20% stock bond mix. Historically, over long periods of time, the more bonds the less loss and the less growth of the money. Vice versa for the aggressive portfolio. Obviously there are several mixtures in between these two examples. If you are interested I will email a sheet which shows four mixes, their returns and the worst year for each. Also this link will help you understand this concept, http://en.wikipedia.org/wiki/Asset_allocation

 The next step is to have a globally diversified portfolio including US stocks and bonds, international stocks and bonds and Real Estate Investment Trust (REITs). To view a wide range of asset classes go to http://www.dfaus.com/strategies/performance.html and scroll down to the Component Funds section.

 Some money managers are adding alternative investments to the mix. Alternatives may include, but are not limited to, commodities, managed futures, long-short funds, arbitrage, hedge type funds etc. Most alternatives investments tend not to be correlated with stocks and bonds and many of them attempt to reduce risk as well. Commodities are the most volatile of the bunch but are often considered an excellent diversifier. If you want to learn more about this type of investments I suggest that you read The Little Book of Alternative Investments written by Ben Stein & Phil DeMuth. http://www.investors.asn.au/reviews/books/?bid=316

 Diversification worked almost perfectly in the “Tech Bubble Crash” of 2000-2001. In fact many asset classes such as Small value, International Value, REITS , and Commodities went up in value. If one’s portfolio wasn’t concentrated in tech and growth companies you came out smelling like a rose!

Unfortunately, diversification did not work that well in 2008; all asset classes except Treasury Bills, Gold and Managed Futures took a big hit that year, Before you put all your money in the best investments of 2008, remember two things; first you will be under diversified and secondly we will not know which type of investments will protect us the most until this mess is over

 In my experience I have found one of the best ways to handle a bear market is also the scariest way. That would be buying stocks during the downturn. You may be asking yourself if I should be committed to the Funny Farm but stay with me and hear me out.

 First let’s start with the fact that stock markets are on an upward trend but not straight up. After the recession in 1945 the S&P 500 was priced at 15. As of August 11 2011 it is priced at 1,169. That’s a 6.8% return and does not include dividends which account for another 3% or so.  The best prices on stocks are at market downturns, think of it as the after Christmas sale for stocks.

 There are two basic strategies to take advantage of this “After Christmas Sale”. The first would be to always have some cash in your portfolio and purchase more stocks when the market “crashes”.  Since we can’t time markets and don’t know when stocks have hit rock bottom I suggest that you have a thought out plan of action to implement this strategy. One may be putting increments of your money in the market once it hits pre determined percentage drops.

 Another strategy is to rebalance your portfolio which simply means selling a portion of your winners to purchase a portion of you losers. In other words sell high and buy low. So if you have a pre determined 50-50 stock bond portfolio and the markets, and stocks went down and bonds went up, your allocation to changed to 30-70. And guess what kids, it’s time to rebalance! Simply you would sell 20% of your bonds to purchase 20% more of stocks. You know you did the right thing when (excuse my French) you feel like crap when you made this change. Remember our feelings often betray us when it comes to investing. Studies have shown that, over time, rebalancing has added almost 1.5% extra return. https://institutional.vanguard.com/iip/pdf/ICRRebalancing.pdf

 Finally if these strategies do not work for you I suggest you have a predetermined percentage drop when you would sell your stocks. I wouldn’t suggest anything less than 15% to account for the market’s natural volatility. This will get you out sooner than later. But remember it’s easier to get out than to get back in again! For instance, if the Dow Jones was at 10, 500 when you sold your equity holdings when would you repurchase those holdings? The common response is “when I’m comfortable.” And when would that be? “Well let’s say when the Dow” hits 12,000 again.”   This investor made the classic backwards decision of selling low and buying high. It was a fear based choice and emotional investing, as we will see in the next blog, never works.

As I am writing this article on August 10 2011 the Dow Jones Industrial Average dropped over 500 points closing at 10, 719.9. This may be an over reaction to the U.S. credit downgrade, a warning of another economic downturn or some combination of the two. None the less it is very scary to see our money drop precipitously in value. This market downfall could be a 10-20% “healthy correction” (an oxymoron if I ever heard one), or we could be heading into another bear market. There have been 11 bear markets since 1940. The average bear market last 386 days with the stock market loosing about 1/3 of its value. Very scary stuff indeed.

Most people think the best way to deal with a bad market is to sell their stocks and wait for the market to “turn around”. We want to feel comfortable again before we venture back into stocks. As crazy as it sounds, this strategy has significantly reduced rather than increased returns.

To time the last market downturn one would have had to sell their stocks on Oct 1 2007 and buy back their stocks on March 6 2009. Now, no one rings a bell to tell us the upward trend is about to start. Also the media, our friends and family did not tell us to get back in either; it is just too damn scary! Of course, no one had the benefit of gazing into a crystal ball so most people sold their holdings in October – November 2008 when the Dow was around 8,000 or so. Since it takes six months to confirm the market has turned around a lot of folks reentered in September 2009 when the Dow was around 9800. In essence most people sold low and bought high. Not a good way to enhance returns…

Unfortunately, no one ever has and I doubt ever will, consistently time the market. The reason is that we have to be right twice, on the way out and back in again. While getting out is easy it is impossible to know when to get back in. It’s always darkest before the dawn and we feel the market will drop lower.

To prove my point let me ask you a few questions; name the five best movie stars or five best athletes from the last twenty years. Although there may be some disagreement it’s not hard to do. Now let’s try to name the five of greatest money managers of all time. Although harder to do a few names such as Warren Buffet and George Soros come to mind.

Now, name just one great market timer. Well I’ve been in the investment business close to 25 years and I can’t think of a single person. Can you? I doubt it, because that person does not exist. Sure some people have come close but most often we’re are better served by investing our money in diversified portfolios and leave the predicting to professional fortune tellers.

In my next blog I’ll go over a few strategies on how to survive another bear market

It has recently entered the public domain that rock star Ozzy Osbourne and his wife, Sharon, owe almost two million dollars in back taxes to the IRS.　 In fact, the IRS has placed a lien on the Osbourne’s beautiful LA mansion. This may mean that if they don’t pay up soon, they are in danger of losing their home. Ouch!

This isn’t the first or last time a celebrity has had tax issues. In the early nineties, country singer Willie Nelson received a whopping tax bill of almost seventeen million dollars. The IRS claimed that from 1978 to 1982 Willie did not pay 6.5 million dollars in income taxes. Add on $10.2 million in penalties and interest and you have a hefty sum. Luckily for Nelson, many of his fans bought his possessions from the estate sale and later returned them to him. Willie later released an album　The IRS Tapes, Who Will Buy My Memories?　 (

Going back to the Osbourne’s, it is heart warming to know that they passed their tax avoidance values to their daughter, Kelly. California recently filed a lien against her for $34,000 of back taxes owed. 　Hopefully, Ozzy can go back on tour this summer and bite off a few more bat heads to enhance ticket sales and pay off his debts. Perhaps mother knows best. “You can’t rely on anyone but yourself. You have to be on top of your own business affairs. My fault. Lesson learned,” Sharon tweeted in regards to the ruling. I guess even the Prince of Darkness is no match for the IRS!

A recent addition of Barron’s Magazine rated mutual fund families by their total performance in 2010. The best performing fund family was Dimensional Fund Advisors (DFA). As of April 2011 DFA has yet to self promote or even mention this crowning achievement. Many people are wondering why DFA has yet to toot their own horn. Most mutual fund companies would either done an advertising campaign or sent their sales force into the field to push their hot performing funds. But DFA is not like most other mutual fund companies. They understand much of the performance came from small and under valued companies which are their forte. They also know that next year could prove to be a banner year for large companies or small companies could continue their torrid pace. They will be the first to admit no one, including them, is privy to what will be the best performing asset classes in 2011.When David Booth, a DFA executive, was asked about his companies success he said; “What was important last year was to stay fully invested. We take diversification very seriously… We tend to be more global than other fund families. We emphasize small-cap and Value stocks globally and in emerging markets. Those factors paid off last year.”

My take on what David said is that you can not get the return of an asset class if you are not invested in it. This can be witnessed through the ten year returns of many of the DFA component funds. http://www.dfaus.com/strategies/performance.html Those returns were not possible to achieve unless you held these assets for the last ten years! What I’m trying to say is that, beyond return, I like and use the Dimensional Funds because they are a company which has integrity. To me integrity means; an investment company which has low fees, sticks to their investment philosophy and of most importance does not mislead investors. And, these days, integrity is a rare quality in the mutual fund world

We are experiencing a time of historical low interest rates. Certificates of Deposits (CD’s) are now paying two and one half percent interest at best and bonds are not offering much return either. This has put folks who are searching for safe, insured and principle guaranteed investments in a quandary. They are asking themselves how I get more return on a safe investment? Unfortunately they often choose the wrong solution which is dividend paying stocks. This type of investment is defined as large profitable (hopefully) companies which tend to be consumer oriented. Their days of rapid growth are behind them but they may pay a dividend of 3-5%. So far so good but the point misunderstood by people new to this strategy is that they are investing in a stock which is not principle guaranteed, not insured and not considered a safe investment. In the quest for a “higher return,” they are replacing a safe investment with a risky one.

Let me make it clear I have nothing against these types of stocks and like the idea of investing some of one’s money into them. I just think many folks are asking for problems when they do so for the wrong reasons. Think back two years ago when large established companies lost 30-70% of their market value. Several of them also declared bankruptcy making their stock worthless. What if you were to invest one-hundred thousand dollars in a stock that pays a five percent dividend and it lost thirty percent of its value? Well, you are now receiving a large dividend on seventy thousand dollars. Was that your original intention? I doubt it.

The moral of my story is not to invest your safe money in risky investments. We all need six to twelve months income in a safe guaranteed account. And at times we will have to sacrifice return for safety and liquidity.

1. Decide how you are going to spend your time.  This is especially true for men and women who have worked all their lives and have few outside interests.  What are you going to do after the first six to twelve months in retirement, and what do you plan to do for the rest of your  life?  More importantly, if you aren’t excited about retirement, then don’t retire. Many people quickly become bored after retiring.  It’s okay – even exciting – to return to school or the workplace.  Many retirees do this, often times in completely new fields.
    
2. Determine how much money you will spend monthly.  Be sure to factor in large occasional expenditures such as a new car or vacation home. To compensate for inflation, add three percent to your needed income every year.
    
3. Anticipate the cost of health care. You’ll have no employer to pay this for you.  Medicare and supplemental private insurance are all up to you.  Also buy long-term-care-insurance.  At best, Medicare will pay up to100 days for a nursing home stay. After that, you are on your own until you have spent most of your money. Then, Medicaid (welfare) will pick up the tab. This may be fine if you are single, but if you are married; your healthy spouse might be writing checks for over $100,000 a year!  
    
4. Determine at what age you should take your Social Security benefit.  Even though you can start taking benefits at age 62, waiting until age 70 will produce the higher total benefits after you exceed age 78.  Since we are living longer, this may be a good bet.  
    
5. Refinance your mortgage.  Many people are shocked to discover that they either cannot borrow money after they retire, or they are forced to pay higher rates.
    
6. Boost your cash reserves. Make sure you have two years of income from your investments in a safe account such as a money market.  Another two years of income should be in a short-term high quality bond fund. This strategy is designed to help you survive a bear market by avoiding taking money out of assets that are down in value.
    
7. Consider inflation and longevity risk. We are living longer, and retirement could last 30 to 40 years (longevity risk).   Every year we lose about three percent of our purchasing power (inflation risk).   Revise your investment strategy to compensate for these two risks.  Although volatile, stocks have historically been the best inflation fighter over long periods of times. Your mix of stocks and bonds should be determined by the amount of money you need to withdraw from your accounts. For younger retires, it is recommended not to exceed a four-and-a-half percent withdrawal rate.
    
8. If a significant percentage of your portfolio is in one stock it is time to diversify! You may have gotten rich on betting on a particular stock but staying rich is a different story.
    
9. Transfer your company retirement plan; i.e. 401(k) 403(b) etc directly to an Individual Retirement Account (IRA). Most of the time you will have more and less expensive investment options
    
10. Review your estate plan. Review your will and trust. Don’t have them? Get them. These documents can protect you and your assets while you are alive and benefit your spouse and children when you pass on.
     
11. Be careful of investment scams and pitches.  If it sounds too good to be true, it probably is!  Most perpetrators of investment fraud are people you already know and very likely could be members of your church or social groups. (Remember Bernie Madoff !)  If you are not sure, feel free to call your home state’s securities department. They are there to help you and may have some insight about fraudulent investment schemes. You will become a prime target for annuity pitches. While all annuities are not bad and inappropriate, many have high surrender penalties that last for many years. 
     
12. Working part-time during retirement may be a good strategy to make your investments last longer.  You’ll withdraw less from your investment accounts.  Don’t be afraid to use your creative talents through self- employment.  If you took your Social Security benefit before age 62, do not worry about “making too much money” which may cause more of your Social Security benefit to be taxed. When it comes to earnings, more is always better. I once had a client tell me that he had a goal of paying $1,000,000 in taxes. I’m guessing he would have to earn about $3,000,000 a year to accomplish that goal. We should all have such problems.
     
13. A year or two before you retire, meet with a fee- based financial planner to help you tackle these issues. You should be able to pay this person to create a retirement plan for you.