Continual Vigilance

Buy high and sell low — It’s not a typo.

Millions of investors guarantee their failure by selecting mutual funds and stocks based on quarterly or annual performance records. Do you chase performance? You might be buying high and selling low!

As the year draws to a close, millions of mutual fund investors begin an annual event to divine next year’s winners. Yet most of these individuals rely heavily on a time-honored - but terribly wrong - method of evaluating strength. Whether analyzing screening tools from websites, reviewing fund honor rolls in magazines, or using star ratings from fund analysts, normally savvy business people foolishly chase the returns of last year’s hottest investments.

This begs the question: Can top performing mutual funds lead two years in a row? Consider a study commissioned by Vanguard Investments Australia and released by Morningstar. The five best performing funds were analyzed from 1994 to 2003. Here are the results:

– Only 16% of top five funds make it to the following year’s list.

– Top five funds average 15% lower returns the following year.

– Top five funds barely beat (by 0.3%) the market the following year.

– 21% of all top five funds ceased to exist within the following 10 years.

Academic studies and market statistics confirm the typical investor acts in direct opposition to the sage advice - buy low, sell high. It’s only after high returns are realized and reported that investors pour money into both stock and bond mutual funds. In fact, Financial Research Corporation compared investor cash flows into mutual funds. Purchases immediately following best-performing quarters exceed 14 times those immediately following their worst-performing quarters. In other words, you are 14 times more likely to buy funds at their highest price than at it’s lowest. Buy high and sell low.

Just what kind of damage are they inflicting to their investment returns? DALBAR, Inc., conducted a well-known study called Quantitative Analysis of Investor Behavior. The study confirms investors’ poor timing and the resulting financial carnage. Investors buy funds immediately after a rapid price appreciation. This just happens to be right before investment performance wanes. Prices fall soon after and the investors quickly dump their holdings to search for the next hot fund. The resulting returns fail to even beat inflation! When measured over the last nineteen years, the average equity investor earned a meager 2.6% annual return. Compare that to a 3.1% inflation rate and a 12.2% return from the S&P 500 over the exact same time period. Not only did investors fail to keep up with the market, they also lost money to inflation.

We’ve all seen the warnings on packages of cigarettes. Even smokers understand their relevance; smoking is not a healthy activity. So why do investors not heed warnings about mutual fund returns? You’ve all seen those statements too. But can you remember what is said? Past performance is not a guarantee or indicator of future results. Research and studies have proven this fact, yet the majority of investors choose to ignore this warning. Yes, it’s an easy means of comparing funds. It also happens to be completely irrelevant. Let me evangelize these words for you. Past performance does not predict future results!

Here’s how you can stop chasing short term performance and stay focused on your financial goals. Identify appropriate long-term investments by evaluating the following:
(1) Leadership: How does the fund perform relative to similar size and similar style funds?
(2) Tenure: How long have the managers and advisors been at the fund?
(3) Management: Managers well-known, highly-regarded (e.g. remember Peter Lynch)?
(4) Consistency: Are the 3, 5, and 10 year returns all above average?

Finally, measure returns based on your entire portfolio. History shows that no single investment success repeats. Accept the fact every year is different and brings new leaders and laggards. Use an asset allocation strategy to guarantee balance and increase long term returns among all your investments. Invest in a diversified portfolio to meet your financial goals and stick with it.

Not yet learned your lesson? Consider this: Fourteen mutual funds topped the 2003 charts with returns over 100%. In 2004, these fourteen funds lost over 4% while the S&P 500 gained 3%. Congratulations, chasing performance lost 7% of your money this year.

Tim Olson

TheAssetAdvisor.com
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Mr. Olson is the editor of The Asset Advisor, a financial investment service providing proven strategies for no-load mutual fund investors. He brings 26 years of education and experience from Stanford University, Ernst & Young financial consulting, personal wealth management, and venture capital investing.

As an expatriate you are in a privileged savings and investing position. Make the most of the options available to you while you can, consider investing offshore for your retirement.

While you reside overseas you are legally entitled to make use of any tax savings in the country in which you reside, furthermore you are most likely in a position to save and invest offshore to fund and fuel your retirement.

Not enough expatriates make use of their offshore advantage when living and working abroad. Don’t make the same mistake!

Do you already have a domestic pension plan in place from your home country that you established prior to working abroad? Have you found that this policy is not as mobile as you are? Does it make sense to continue with the savings policy?

Have you been considering switching from retirement savings plan to savings plan as you change from country to country? Did you know that by doing this the income you end up with in later life will be fragmented and may be whittled away by foreign exchange costs, charges or even a cash-strapped government?

Or are you one of the lucky few who need read no further - one of the lucky few working for an international company who offer a pension plan to expatriate employees as part of their benefits package?

If you are not one of the lucky few and you understand that the onus is on you to provide for your own retirement this article may be able to help you.

If you are looking for the most sensible offshore investment solution for your retirement savings planning you need to consider finding a safe harbour where you can anchor your retirement investments so that you can move from country to country as necessary without this having any negative impact on your assets.

If you decide to do this, you need to find out exactly which safe harbour or tax haven is the best for you.

Offshore financial centres present a viable solution - especially if you are undecided as to your eventual retirement destination. Basing your pension investment offshore should mean that future movements of capital or income are not impeded.

However you should remember that any retirement income you take could be liable for taxation depending on where you are living at that time.

When it comes to offshore retirement planning what do you need to be aware of?: -

Your own personal circumstances are unique.

Be realistic about how much you should be contributing.

Consider the charges the bonuses and the flexibility of any investment plan - generally the more flexible the plan the more charges will be.

Know that a good offshore retirement plan should allow you to do the following without penalty:-

1 Reduce contributions without penalty (normally after an initial period of one to two years).

2 Switch investments between different funds to respond to changes in the market. Preferably including funds managed by other people outside of the institution zone.

3 Have the option of retiring when you want to without penalty.

4 Allow certain access to monies invested (again, after an initial period).

How to Find the RIGHT Offshore Savings Solution

Finding out what each provider’s best products are currently, and then hand picking the best to suit your own personal needs and current circumstances is the best idea!

But how impractical!

Do you have the time to do this?

Would you consider yourself an expert in offshore investments and pension planning?

Where would you start?

Obviously professional advice will get you the right solution and save you time and money and reduce your cost of delay significantly!

Pension Surrender

Cashing in an onshore pension is rarely the best option available to you.

If you have taken out an offshore pension policy and you are unhappy with it or want to take a break from paying into it, consider all the options that are available to you before you decide on your path of action.

Generally with an offshore pension up to the first 2 years of contributions are committed to being invested until maturity - meaning that if you cash in your policy early you will potentially be wiping hundreds or thousands off your potential returns.

This is money you would be literally THROWING away!

Instead of encashment could you take a payment holiday or change your investment focus?

Instead of encashment you HAVE to speak to a brokerage to find out what options are available to you and which options are BEST for you.

You do not have to speak to the adviser or brokerage who set up the initial policy for advice - a good independent financial adviser will be happy to assist you with any previous policies.
Get Informed!

Simply put, if you haven’t started your retirement planning or you want to check whether you need to do more or you want to find out what you can do with policies already in existence - from company pensions, personal pensions and offshore pensions - you need to act now!

Find the right person to advise you about exactly what is available in the market place today.

Find the right person to get the best solution in place for you sooner rather than later!

Rhiannon Williamson is an experienced publisher who has produced articles for leading travel and tourism guides and financial magazines. Her specialist knowledge about both travel and finance gives her site Shelter Offshore the unique ability to literally cover every single aspect of moving & living abroad - including the often less discussed offshore tax advantages that can be available when leaving our homeland.