The Employee Benefit Research Institute (EBRI) just released the results of its annual “Retirement Confidence Survey” and one of the more startling findings was that 27% of working Americans say they have less than $1,000 in retirement savings, up from 20% a year ago, according to FOXBusiness.com. For the second consecutive year, nearly 50% of those polled said they are pessimistic about having enough money to “live comfortably” throughout their retirement years, up 33% from 2002’s survey results. At that time the previous recession had just ended and the bear market was still more than six months away from bottoming.

How far would $1,000 go in your retirement?   Or are you planning on depending on Social Security?  (We all know the folly of that!)  Do you have a plan in place to achieve your financial goals in retirement?  Having a financial advisor is the first step in setting your plan in action.  A financial advisor can help you develop a plan where you can save money systematically and watch it compound over the long term.

Don’t get caught near retirement with only $1,000 in your pocket!

Today is March 9th. Do you remember where you were one year ago today? I do.

It was a Monday.  I was sitting in my office answering phone calls. Phone calls from a couple of clients who just reviewed their February account statements over the weekend.

February, 2009 was one of the worst months for stocks since the 1930s.  February was also the sixth month in a row that the stock market was down. By Monday, March 9th, things only seemed to be getting worse. On that day the S&P 500 hit a new low for the bear market.  This wasn’t just any low. It was a 12-year low!

The mood was bearish. Investor confidence was low and people were dumping stocks like crazy. Some believed we were going to see another Great Depression.  One of my clients actually told me that he believed America was going to go out of business.

Both of my clients were ready to “draw a line in the sand.”  They were determined not to lose any more money in the stock market. Of course, these weren’t actual losses until we sold the stocks.  They asked me for my outlook. They asked me what we should do.

Not knowing at the time that this would be the day the market would decide to bottom, and then surge 68% over the next year, I advised both of my clients to stay put.  I was confident that the market was getting close to a bottom and thought this would be the absolute worse time to sell stocks.

Client: “But, Adam, we just can’t afford to take losses!”

Me: “Then don’t take them!”

Client: “But, Adam, let’s sell our stocks and go to cash. When things look better and the economy looks stronger, we’ll get back into the market.”

Me: “OK. Sounds good in theory. How will you know when things are better? What will you be looking for?”

Client: Silence. “…Well, I don’t really know. I guess we’ll get back in when I feel better about the economy and the market.”

Me: “By then it’ll be too late. You won’t feel better until the market has already made a significant rebound. If you sell today, you’re missing out on an opportunity to benefit from a recovery.”

What I should have said: “Dude, you’re about to make the worst mistake of your life.” [My thoughts were no different on March 9th, than they were when I wrote this post on February 11th.]

So, what did my clients decide to do? Well, first you should know that whenever we take on a new client we talk about the possibility of market downturns. We talk about volatility risk. We talk about the ups and downs of the market and discuss how our clients might react during downturns.  We try to prepare for things like this. But, as much as you try you can never simulate reality.  The reality of living through this bear market was tough…for everyone. It took patience, faith, and discipline to ride it out. Thankfully, both clients decided to stay the course at a time when they felt like giving up.

As it turns out, they made the right decision. The S&P 500 is up 68% from the bear market bottom a year ago today. Had these clients sold their stocks they would have missed out on the V-shaped recovery that Brian Wesbury predicted. The 68% return for the S&P 500 is the best rolling 1-year return for the index since the 1930s!

Chart via Bespoke Investment Group

So what’s the lesson? Fear and greed are an investor’s two worst enemies. In a bear market, fear can lead you to sell at precisely the wrong time. Great investors take the Warren Buffett approach and buy stocks in a bear market.

Never, never, never let emotions dictate investment decisions. Selling out of fear, and buying when things feel right, will burn you every time.  You must have a strategy for investing.  And then, follow it! Don’t give up on a sound investment strategy during the tough times.

A sound investment strategy starts with a philosophy that dictates the type of investor you are.  Are you a long-term or short-term investor? Are you a trader? Are you a value or growth investor?

Once you settle on an investment philosophy you need to have a process. What types of investments will you buy? When will you buy? What is the criteria for an investment you will make? When will you sell?

At our firm we offer investment strategies.  Every strategy we offer has a philosophy and a process that dictates when we buy and sell. Our goal is to eliminate the emotions from our decision making. And, I can tell you it’s not easy. I can recount several times where we’ve let our emotions override what the strategy was telling us to do…and we made a mistake. But, I can also show you the times when we invested contrary to what our emotions were telling us to do and it worked!

Photo by Sad Guys on Trading Floors

Chart by Bespoke Investment Group

Were the 2000′s really a lost decade? That’s what the media is telling us.

Don’t believe it. For me and for the investors I know the 2000′s were not a lost decade.

In a previous post I gave you four reasons why a good investor should not have had a lost decade. One of my points was that good stockpickers should have made money over the last 10 years.

So, let me show you who some of the best stockpickers were over the last decade.  I searched Morningstar’s mutual fund database as of December 31, 2009 to find all large cap U.S. stock funds that had an average annual return of 10% or more over the past 10 years.  I came up with 4 funds that met this criteria:

CGM Focus (CGMFX)

10-year annualized return: 17.89%

Manager: Ken Heebner

Strategy: This fund is usually invested in fewer than 25 stocks.  Mr. Heebner will trade very frequently among stocks and sectors often making large sector bets. The manager is also able to short stocks and will occasionally short a large position in the portfolio.

Fairholme (FAIRX)

10-year annualized return: 13.21%

Manager: Bruce Berkowitz

Strategy: This fund manager has adopted the principles of Warren Buffett.  The fund primarily seeks to buy good businesses that are run by great managers.  The fund will also invest up to 25% in turnaround stories or “special situations”. Mr. Berkowitz invests in  a small number of postions (currently 20), often holds large amounts of cash (currently 22%), and will make large bets on single positions (currently PFE is nearly 13% of the portfolio).

Yacktman (YACKX)

10-year annualized return: 11.90%

Manager: Donald Yacktman and Steve Yacktman

Strategy: These fund managers prefer to invest in profitable companies that generate lots of cash, have little debt, and are selling at discounts to what they think the whole business is worth. The fund is concentrated in just a few names (around 40) and they hold most of their stocks for a long time.

Yacktman Focused (YAFFX)

10-year annualized return: 11.82%

Manager: Donald Yacktman and Steve Yacktman

Strategy: The strategy for this fund is the same as the Yacktman fund, but with one difference.  This fund will own a fewer number of stocks and focus on the managers’ best ideas.

As I reviewed this list I came up with 3 obvious takeaways from the results:

1. Active management works. Every one of these funds employ an active investment strategy where they have a method that results in a portfolio that looks much different than the benchmark (the S&P 500 Index).  Every one of these funds also beat the benchmark by over 12% a year for the last decade.
2. Concentrated portfolios can pay off big when the manager is right. Each of these funds have a portfolio of 40 stocks or less. The managers each had a strategy to determine which stocks had the greatest investment potential.  Each manager focused on buying just their best ideas for the fund. Concentration can also hurt a fund when the manager is wrong. If you’re going to invest in a fund that has a small number of positions you want to be sure the manager has a successful track record of being right over the long term.
3. Owning too many stocks can hurt you. If you owned an S&P 500 index fund you would own 500 stocks in your fund.  None of these funds own more than 40 stocks.  The more stocks you own the more diluted your portfolio becomes.  Owning a large number of stocks prevents you from making large bets on companies you really believe in.  Companies that give you confidence and conviction.

Well, it’s that time of year again.  It’s time for the annual lists of top performing stocks, mutual funds, and ETFs of 2009.  Since it’s the end of the 2000′s we also see lists like “The 11 Best Performing Stocks of the 2000’s“.

For many investors, it will be tempting to “chase performance” and buy last year’s winners or the hot performers of the last decade.

Bad idea!

Here’s why:

Often the best performing stocks from last year will be this year’s losers.  It also works the other way….last year’s losers often turn out to be this years winners.

As Bespoke Investment Group brilliantly points out, the worst stocks of 2008 have become the best stocks of 2009.

• the 50 stocks in the S&P 500 that did the worst in 2008 are up an average of 101% in 2009!
• The 50 stocks that did the best in 2008 are up an average of just 9% in 2009.

2009 was definitely a year when buying last year’s losers worked and buying last year’s winners failed.  However, I can guarantee you that it won’t always work that way.  You should never base your investment strategy simply on last year’s performance.

By the way, I hope you didn’t buy Medifast (MED) at the beginning of this year just because it was the best stock of the last decade.  As of 1:30pm on Tuesday it was down 30% for the year-to-date.

Don’t chase performance!

Graph by Bespoke Investment Group

Fear and greed are the two most dangerous emotions that investors will face.  But, I think fear is the bigger problem of the two.  Why?  Because fear can prevent you from ever investing in the first place!

FEAR leads to procrastination. It’s good to have an analytical mindset, but don’t let it lead to analysis paralysis.  We can over-analyze to the point where we wait too long to get in an investment and we miss out on gains, or worse, we never invest at all and completely miss an opportunity.  Don’t be afraid to make mistakes.  Every good investor has made their share of mistakes.  Mistakes are good.  We can learn from them.  A good investment strategy includes principles that have been tested over time.  Assuming you are following good principles and decision making rules you will find that over time your wins will become greater and your losses fewer.

FEAR of loss will never bring reward. You have to take risks if you want the rewards of investing.  There are no shortcuts.  You won’t become wealthy by keeping your money in money market funds and CDs.  Of course it’s important to avoid losses, but realize that risk is necessary if you want big rewards.  Learn to take calculated risks.

FEAR intensifies as your portfolio grows. As the dollar amount of your portfolio grows the fluctuations seem larger.  For example, lets say you are an investor just starting out and you have a $10,000 portfolio.   If we have a bad year in the stock market (like last year) your portfolio may take a 10% hit, or a loss of $1,000.  Now let’s fast forward 20 years and assume your portfolio has grown to $1 Million.  A 10% loss on $1 Million would be $100,000.  Now that’s a little harder to swallow than the $1,000 loss…huh?  The loss is still the same 10% but it seems greater because you are now dealing with a much larger dollar amount.

FEAR leads to pessimism.  As we get older we tend to get more conservative.  That’s OK because preserving what we have accumulated in our portfolio is important as we approach retirement.  But, I’ve seen it work against investors too.  Some people get so conservative that they are afraid to take any risk at all.  A natural part of investing is dealing with uncertainty.  It seems that there is always a reason to be uncertain about the future of the economy.  Most investors I know have built there wealth by being optimistic during times of uncertainty.  Uncertainty can lead to fear which can make an investor very pessimistic…always looking for reason not to invest.  While it’s important to consider the risks when investing you should seek to find opportunities and reasons to invest.  Most successful investors I know tend to have an optimistic outlook.

Don’t let FEAR stop you from being a successful investor.  Learn how to manage this powerful emotion.  Learn how to determine when your fears are justified and when they should be ignored.

So, how do you deal with fear when it comes to investing?