Thanks to a colleague, who wishes to remain anonymous, for the following:

Over six years ago, Fortune writer Justin Fox wrote an article titled, “Is the Market Rational?” Much of the article focused on the intellectual rivalry between two Chicago professors—Eugene Fama and Richard Thaler—and Fox made no secret which of the two he found more persuasive. The next generation of finance professors, he said, were “ripping Fama’s teachings to shreds,” and market efficiency as an organizing principle was being shouldered aside by something called “behavioral finance.” In this view, irrational investors make systematic judgment errors that produce predictable patterns in stock prices. Fox noted approvingly that the Nobel Prize in economics had been awarded the previous month to a Princeton psychology professor in recognition of his work on behavioral biases and suggested it was possible for investors with sufficient “contrarian gumption” to outperform the market by exploiting such biases. But he doubted most of his readers would be successful in this effort, due to their own propensity to make mistakes. His conclusion for investors? “That’s easy,” he wrote. “Buy and hold. Diversify. Put your money in index funds. Pay attention to the one thing you can control—costs—and keep them as low as possible.”

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How would you live your life or what would you do differently?

Now, before you think I’ve gone all New Age on you, I consider myself a practical guy and realize you can’t just “wish” your problems away.  Further, I don’t subscribe to the notion that if you blindly follow your passions you’ll find an emotionally and financially rich and rewarding life along the way, although it can certainly happen.

At the end of the day (or maybe I should say the end of the month), you still have to pay your bills and put food on the table.

Having said all that, I still think this is a valuable exercise.  Seriously, think about it … What if you couldn’t fail?

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In the following video, David Booth, Chief Executive Officer, Dimensional Fund Advisors, discusses the importance of balancing volatility risk and purchasing power risk when investing for retirement.

He explains that T-bills have not produced the real returns necessary to preserve living standards over the long haul, and illustrates how investors can manage both types of risk through an appropriate commitment to stocks.

Please leave your feedback and comments below.

Whether you measure interest rates by looking at mortgage rates, bond yields or your money market fund, they’ve begun to creep up from their recent lows.

Will they steadily climb higher and higher? I don’t know, and neither do you.  That’s not the point of this blog post.

However, I’d like to remind you of a often-used quote in the financial advice industry:

More money has been lost chasing yields than at the point of a gun.

The natural tendency is to try to find the most “bang for your buck” that you can right now.  And for many who are scared of the equity markets, they have a lot sitting in cash and/or fixed income.  The only problem is that you could wind up with all bang and no buck.

So what’s the answer?

Everyone wants the most return they can achieve on their liquid or semi-liquid funds, but you must always remember that risk & return are forever linked together.  You can’t get above average return without above average risk.

So, be careful of these fancy sounding bond funds or these “too good to be true” CDs or other products.  If it sounds too good to be true, it is.

I recommend an allocation to some level of fixed income in all my clients’ portfolios, and regardless of the market or interest rate environment, I always recommend high quality and short maturities.  No junk bonds.  No convertibles.  No preferred stocks. 

In my opinion, fixed income is present in a portfolio to offer a diversification benefit relative to equities.  They’re certainly not there to increase or compound the your overall portfolio risk level.

What do you think?  Is this too conservative or will “slow & steady” win the day regarding fixed income?

I welcome your comments below.