Thoughts, ideas, suggestions and education from financial adviser Jim Ludwick, Founder of MainStreet Financial Planning, Inc. of Odenton, MD; Washington, DC; New York City, and Santa Barbara, CA

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Wednesday, January 22, 2014

Why didn't I do that good? Investors want to know...

It's a new year and all the investment results are in.  I keep seeing 30+ percentage point increases for several assets classes and mutual funds for the year just past.  You probably do too.  Now everyone is wondering why their accounts didn't go up 30 percent and why some of the funds, namely bond funds, went down in value.

Attention: An account or total holdings is NOT an asset class. That's all your eggs in one basket.  Today's big winner is liable to become a big loser in a correction mode.

Bonds and bond funds got repriced lower by the market last year just like houses did a few years ago.  Everyday, custodians must mark securities as if they were sold at the end of the day, what price would they fetch.

When interest rates rise, then the value of the bond or bond funds currently held are not worth as much to a buyer since new bonds just being issued pay more that the bonds or bond funds you hold that feature a lower interest rate.  I know that's a long sentence. Sorry.

The same holds true for other asset classes or mutual funds that weren't as popular last year.  Gold funds, mining funds, energy funds didn't do as well and were sometimes worth less at the end of the year.

My old boss, Ken Fisher, said it best: If investors want more of a stock (mutual fund) then the price goes up.  If they want less of a stock or mutual fund, then the price goes down.  Investors have alternatives to where their money is currently deployed.

Remember the sage adage, "Buy low, sell high"?  Well now might be the time to implement by re-balancing.  I know its hard to sell last year's winner since we assume it will continue to go up, and buy last year's loser assuming it will go down some more.  Both opinions could be correct.

However, over time, it appears that the market is self correcting and usually does it at some surprise point no one can predict in advance.  Re-balancing to a target percentage has proved to be soundest strategy over longer periods of time, say five to ten years.

If you'd like to read up more on this philosophy, then we recommend Charles Ellis' "Winning the Loser's Game" 6th edition, and William Bernstein's "The Four Pillars of Investing" second edition.

So be happy that a lot of your holdings went way up last year and that you are ahead of your target percentages for the past five years.  Don't dwell on the losers so much that you miss an opportunity to dollar cost average a bargain if it still is a viable asset class.

Good luck.  We all will need it this year.