Kuroda and the Japanese economy

davidkotok:

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This commentary was written by Bill Witherell, Cumberland’s Chief Global Economist.  He joined Cumberland after years of experience at the OECD in Paris. He can be reached at Bill.Witherell@cumber.com.

At last week’s gathering of central bank presidents in Jackson Hole, the European Central Bank’s Mario Draghi and the US Federal Reserve’s Janet Yellen stole the limelight. Rather less press attention was paid to the remarks of Bank of Japan Governor Haruhiko Kuroda, whose monetary policies have been largely responsible for the recovery of the world’s third largest economy (after the United States and China). 

An expansive quantitative easing program, one much bigger relative to the size of the Japanese economy than the quantitative easing undertaken by the Federal Reserve, has been the one element of Prime Minister Abe’s economic program (“Abenomics”) that has clearly been successful. QE is the first “arrow” of the program. The other two “arrows,” fiscal policy and economic reform, have been notably less effective. Economic reforms have been modest thus far, and the net effect of fiscal policy has been negative due to the consumption tax increase in April.

In recent weeks, as the extent of the second-quarter pullback in the economy became evident, an increasing number of observers have asked whether “Abenomics” is failing. Friday’s lead editorial in the Financial Times was titled “Abe must keep his project on track – Japan’s economic recovery hangs in the balance.” It is evident that moving the economy onto a positive and sustainable growth path will require the Bank of Japan to maintain, and probably increase, its massive monetary stimulus well beyond the end of this year.

Kuroda’s remarks at Jackson Hole imply that the BOJ is committed to this course. “We will continue our current monetary policy, but if there is anything which could derail our course toward the 2% inflation target, we will not hesitate to change or adjust our policy.” Furthermore, he noted that the BOJ’s monetary easing policy might have to be pursued “for some time.” That will be necessary to get to the point where “inflation expectations are anchored to 2 percent.” He explained that creating and maintaining  the expectation that inflation will continue at a positive, if modest, rate for the foreseeable future is essential to get firms to raise wages and invest rather than to continue hoarding cash.

It looks very likely to us that reaching and staying at a core inflation rate of 2% will require additional monetary stimulus. That course will keep interest rates at a very low level, stimulate the Japanese economy, and be positive for asset prices. Even if the 2% target proves to be elusive, as some economists argue, Japan should see an end to the deflation that has had such a destructive effect on its economy.

Of course, Abe should not rely solely on the central bank to keep his economic recovery program on track. He needs to sharpen and accelerate the economic reform “arrow” of Abenomics, focusing in particular on the labor market. Also, in view of the experience with the first of two planned increases in the consumption tax, he may find it prudent to delay or cancel the second increase, a move from 8 to 10%, scheduled for next year. It would be better to wait until consumer spending has a stronger basis of rising real wages.

As the economic recovery appeared to stall in the second quarter, many individual investors decided to close their Japan equity market positions. Institutional investors were less quick to depart. Despite concerns about the recovery, the Japan TOPIX Index is up 10% over the past three months, a period when the S&P 500 gained 5.5%. The latest flash (August) Japan Purchasing Managers’ Index for Manufacturing is the strongest since March, with output and new orders rising sharply. This  suggests the economy is resilient, recovering quickly from its second-quarter swoon. While we expect the Japanese economy will advance at a very moderate pace in the coming quarters, corporate earnings are expected to remain strong.

At Cumberland, we remain positive about Japanese equities and are maintaining the significant Japan positions in our International and Global Equity ETF portfolios. Along with the expected general effects of the monetary stimulus program on the economy, the Japanese equity market is receiving support from the BOJ’s purchases of equity market ETFs. (Consider what the effect would be if the Fed started buying US equity ETFs.) . Also, the government pension plan is increasing its allocation to domestic equities.

US investors now have some 19 Japan equity market ETFs from which to choose, not counting leveraged or inverse ETFs. The two most liquid by far are the iShares MSCI Japan ETF, EWJ, which is up 2.6% over the past six months, and the WisdomTree Japan Hedged Equity Fund, DXJ, which is up 5.12% over the same period. DXJ is hedged against changes in the yen-US dollar exchange rate, and its holdings are based on dividends. A currency hedge looks prudent to us.

Our outlook for continued and expanded monetary stimulus implies further depreciation of the yen versus the US dollar in coming months. The Deutsche X-Trackers MSCI Japan Hedged Equity ETF, DBJP, is another total market-hedged ETF that has good liquidity and a lower expense ratio. It is up 4.04% over the last 6 months. The small-cap sector in Japan is also worthy of consideration. The most liquid ETF is the WisdomTree Japan SmallCap Fund, DFJ, which is up 7.10% over the past six months. The hedged alternative, the WisdomTree Hedged SmallCap Equity Fund, DXJS, was launched just last year and is considerably less liquid. It is up 7.81% over the past six months.

Cumberland Advisors Website

Twitter: @CumberlandADV

Photo credit: Les Taylor

(via yahoofinancecontributors)

ryandetrick:

Why This Bull Market Could Last Another 15 Years
Is there really another 15 years to the current bull market?  Chris Hyzy of US Trust said just that Monday on CNBC.  The call got a lot of press and needless to say, the very vocal group of bears who have been fighting this bull market for years scoffed at this even having the slightest chance.
He isn’t the first person to say something like this, as fellow Yahoo Finance Contributor Ralph Acamapora said the exact same thing back in May.  In late 2010, I started saying we were now in a new secular bull market.  It was pretty early for that call and I got my fair share of hate for saying it.  Four years later I still feel we’re in a secular bull market.  I have no clue how far it’ll eventually go, but I do think we have many years left.  
One trademark of true bull markets is new all-time highs.  The S&P 500 (SPX) made 45 new all-time highs last year and has added another 30 so far in 2014.  That’s a good thing, don’t be fooled into thinking new highs are bearish.  
Last month, I showed that new all-time highs had returns after new highs pretty much in-line with the at-any-time average returns.  So making new highs isn’t some bearish event like so many claim.  
Now for the good stuff, new highs tend to happen in clusters that can last years.
To keep this very simple, we saw new highs in the ’50s and ’60s, then very few in the ’70s.  Then continued new all-time highs for another two decades, ending with the horrible overall performance of the 2000s.  Now here we are in a fresh new decade and new highs are starting to pop up again.

Take another look at that chart above.  Could we really have another 15 years of this bull market?  At first, it sounds ridiculous to even ask I’ll admit, but once you look at the chart above we can all agree it is at least possible.   
So one last time, could we really have another 15 years of the this bull market?  I have no idea to be honest.  Still, my best advice is be open to it.  It has happened before and very well could happen again.  Don’t be one of the guys using CAPE ratios to stay out or blaming QE for the bull market.  Good luck out there.
Photo thanks to Watcher1999.  

Sounds ridiculous but that is a telling chart for sure. High-res

ryandetrick:

Why This Bull Market Could Last Another 15 Years

Is there really another 15 years to the current bull market?  Chris Hyzy of US Trust said just that Monday on CNBC.  The call got a lot of press and needless to say, the very vocal group of bears who have been fighting this bull market for years scoffed at this even having the slightest chance.

He isn’t the first person to say something like this, as fellow Yahoo Finance Contributor Ralph Acamapora said the exact same thing back in May.  In late 2010, I started saying we were now in a new secular bull market.  It was pretty early for that call and I got my fair share of hate for saying it.  Four years later I still feel we’re in a secular bull market.  I have no clue how far it’ll eventually go, but I do think we have many years left.  

One trademark of true bull markets is new all-time highs.  The S&P 500 (SPX) made 45 new all-time highs last year and has added another 30 so far in 2014.  That’s a good thing, don’t be fooled into thinking new highs are bearish.  

Last month, I showed that new all-time highs had returns after new highs pretty much in-line with the at-any-time average returns.  So making new highs isn’t some bearish event like so many claim.  

Now for the good stuff, new highs tend to happen in clusters that can last years.

To keep this very simple, we saw new highs in the ’50s and ’60s, then very few in the ’70s.  Then continued new all-time highs for another two decades, ending with the horrible overall performance of the 2000s.  Now here we are in a fresh new decade and new highs are starting to pop up again.

image

Take another look at that chart above.  Could we really have another 15 years of this bull market?  At first, it sounds ridiculous to even ask I’ll admit, but once you look at the chart above we can all agree it is at least possible.   

So one last time, could we really have another 15 years of the this bull market?  I have no idea to be honest.  Still, my best advice is be open to it.  It has happened before and very well could happen again.  Don’t be one of the guys using CAPE ratios to stay out or blaming QE for the bull market.  Good luck out there.

Photo thanks to Watcher1999.  

Sounds ridiculous but that is a telling chart for sure.

(via yahoofinancecontributors)

More Than Half of the Upper Middle Class Saves Nothing

bencarlsonyahoofinance:

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Here’s another one to add to the ever-growing list of scary household saving statistics courtesy of Businessweek:

"Just 45 percent of upper-middle-class households (income from $75,000 to $99,999) saved anything in 2012, according to the Fed study. That means the other 55 percent didn’t save for a house, retirement, or education. About 16 percent spent more than they earned and went further into debt. The report highlights the consequences of these hand-to-mouth habits: Only half of these households had enough savings to finance three months of living expenses if they lost their job or couldn’t work. A $400 emergency would force about 20 percent of them into months of debt.”

Although the financial crisis was tough on many people’s finances, this isn’t necessarily an issue born out of a severe recession. This has been going on for some time now as you can see from this graph:

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These aren’t lower income households. This is a large percentage of the upper middle-class that don’t save a dime.

You could point to any number of reasons for the fact that people don’t save any money, but for many it’s simply too difficult to know where to begin. No one teaches you how to manage your personal finances in school. You’re on your own.

The problem for most people is that it’s easy to find reasons to not save any money. There will always be something there to impede financial progress.

It’s almost cliché at this point to compare fitness or losing weight with personal finance principles, but the analogy works. A recent Esquire profile on Chris Pratt (of Parks & Rec and Guardians of the Galaxy fame) reminded me of how difficult it can be for people to just get started when they’re in a rut.

Here’s Pratt talking about the changes he’s seen since he went from being overweight to getting into super hero shape:

"When I was way out of shape, the idea of using whitening strips on my teeth seemed terrible. I have to do that every day? I’ll never do it. What you want is instant results when you’re out of shape. You want your teeth whitened in 45 minutes with the use of lasers.”

Substitute saving for retirement, paying off credit card debt, creating a budget or any of the personal finance basics for teeth whitening here. When it seems like there are a million different things you need to do to turn your finances around, doing the little things will seem pointless.

But it’s amazing how small successes can build on one another like compound interest once you start to see some progress from putting simple systems in place. Here’s Pratt with how his views have changed now that he’s turned things around:

"I like clothes now. I have more energy. I sleep better. My sex drive is up. Blood’s flowing. I’m less susceptible to impulse. I’m in a different mode.

But when you’re in shape, you know it’s the result of doing a little bit every day. Moments aren’t just moments. A moment might be a week or a month. So instead of Boy, I’d love to eat this hamburger right now, I’m considering a little further into the future. I’m thinking, I eat that hamburger and that’s 1,200 calories, and I’m gonna work out tomorrow and lose 800 calories. I may as well eat a salad here, still do that workout, and then I’m actually making progress.”

Generally this is how financial progress is made as well. Your entire mindset changes and instead of treading water you actively search for ways to continue making progress. And the incremental daily changes that Pratt talks about start to evolve into the correct long-term mindset that gets results.

There are no shortcuts to building a solid personal financial ecosystem. It’s about instituting systems that allow you to build wealth methodically over time. The easiest first step in the process is to automate as many financial decisions as possible. Progress doesn’t have to be impossible but it’s never going to come from a quick fix.

This post from Ben Carlson (@awealthofcs) originally appeared on A Wealth of Common Sense.

Photo: Ken Teegardin

Fed move no sooner than 4th quarter, 2015

davidkotok:

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This is a guest post by Bob Eisenbeis, Cumberland Advisors’ Vice Chairman and Chief Monetary Economist.

Janet Yellen has given her widely anticipated opening speech at the Federal Reserve Bank of Kansas City’s Jackson Hole Conference. As expected, she devoted her remarks to the labor market, which is the subject of this year’s conference. Her discussion covered a wide range of issues and questions concerning current conditions in the labor market and how they might or might not be changing. To be sure, she emphasized that while current market conditions are clearly improving, in some cases they are changing more rapidly than the Committee anticipated, there is significant room for more improvement.

Yellen’s presentation set up the remaining panels of the conference by highlighting what we currently know and don’t know about labor market dynamics and how those answered and unanswered questions are impacting the FOMC’s assessment of current market conditions. She not only explained why the headline unemployment rate is not capturing what is truly happening in labor markets but also moved beyond that simple measure to consider a host of other issues.  These included: labor market slack and difficulties in measuring it; the recent changes in the labor market participation rate; the problem of the chronically unemployed; the role of people who are employed part-time but want full-time jobs; labor market flows in terms of quits and hires; workforce demographics and the impact of an aging workforce; the disappearance of so-called middle-skill jobs; the impact of disability rates, retirements, and school enrollments; and finally, the effects of the recession on wages and productivity gains.

But she also moved beyond just that discussion of key labor market issues to devote attention to how they are shaping the formulation of monetary policy. Implicit in her discussion was the dual role that labor market conditions and the measurement of slack are playing from a policy perspective. Her attention focused mostly on the Fed’s dual employment/inflation mandate, and here she emphasized the goal of promoting full employment in a way that broadly improves labor market conditions, rather than just seeking to lower the unemployment rate.

At the same time, there is also a second implicit role that labor market slack is playing in the policy debate, and that involves its impact on inflation. Most contemporary macro models focus on measurements of labor market slack and deviations of real GDP from its potential as indicators of possible inflation pressures. Tight labor markets and wage inflation – combined with an economy growing above trend – signal that inflation is or soon will be a problem. In the framework of such models, there is no financial sector and no role for money in the dynamics of inflation. Inflation is viewed as being driven solely by real-side factors. So, in this view, slack in labor markets combined with an economy growing at or slightly below trend is evidence that inflation is not a near term problem nor is likely to become one, so accommodative policy is not an issue.  What the press and markets took away from the presentation was Yellen’s observation that, despite the labor market improvements that have occurred, considerable slack in remains, and hence, rates will remain low until greater improvement is evident. To be sure, Yellen and other Federal Reserve officials took great pains to emphasize that policy will definitely depend upon incoming data, so any inference about when the FOMC will begin policy normalization cannot be made at this time.

Where does the Fed’s posture leave those people who are now arguing that a policy move is now likely as soon as the end of the first quarter of 2015? Their conclusion is based largely on two considerations: first, on their optimistic forecasts that real GDP growth will exceed 3% for the second half of this year, further lowering the unemployment rate and putting upward pressure on wages, and, second, on the observation that the minutes of the most recent FOMC meeting suggested that there is growing talk of policy normalization.

Is this view reasonable? We won’t comment here on GDP projections, but we will comment on the minutes and the inferences being drawn. A careful reading of the minutes suggests a number of observations and conclusions.

First, the FOMC is initiating a discussion of how policy will be normalized is simply good planning but tells us little about how far off such a policy move actually is. Second, it is clear that there is no consensus as to how policy should be normalized, when the FOMC should stop rolling over its securities, how the four relevant policy rates (discount rate, interest rate on reserves, federal funds rate, and reverse repo rate) should be set relative to each other, what role forward guidance will play or what the timing will be. Indeed, the FOMC has just formed yet another committee to consider its communications policy. Given this lack of consensus – and the minutes make it clear that there are widely divergent views on all these issues – it is not realistic to assume that views will coalesce on these critical issues in just the next few months so as to enable a shift in policy as soon as March.

Third, even if there were a consensus, great uncertainty remains as to how markets will react to any policy move or even to a hint that a policy move is imminent. A sharp market reaction – and it is not unreasonable to fear that rates could jump precipitously as holders of large portfolios of low-yielding bonds dump them abruptly to avoid capital losses – could destabilize markets and derail the recovery.  This point was raised as a possibility by former Fed Vice Chair, Alan Blinder, in an interview he gave at Jackson Hole on Thursday.

Fourth, both the U.S. economy and economies in the rest of the world are facing various headwinds that could pose problems for growth.  Housing still hasn’t recovered.  External demands for exports could slow because of slow growth worldwide.  Then there numerous and significant geo-political issues, any one of which could further contribute to increased market volatility and threaten the recovery.

Finally, one must also consider the fact that the bulk of the FOMC voting members– which comprises the seven governors and President Dudley – control the policy vote.  Only one clearly more hawkish voice, represented by President Lacker, will even have a vote next year.  Thus, it appears from all the FOMC participants’ public utterances, including Chair Yellen’s speech at Jackson Hole, that the probability is extremely high that the Fed will wait rather than act preemptively. Thus it is likely that, in terms of labor market issues, conditions for a rate move will not be in place until at least the end of the third quarter of next year.

Cumberland Advisors Website

Twitter: @CumberlandADV

Photo credit: FMJ

(via yahoofinancecontributors)

Welcoming David Kotok to Yahoo Finance Contributors

yahoofinancecontributors:

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Today, we’re so pleased to welcome David Kotok to Yahoo Finance Contributors.

David helped found Cumberland Advisors over 40 years ago and has been its chief investment officer for as long. Cumberland is one of the premier advisory firms in existence and manages over $2 billion in fixed income and equity accounts.

David earned his undergraduate and graduate degrees from the University of Pennsylvania and he currently serves as a Director and Vice Chairman of the Global Interdependence Center.

David is an ace fisherman too, throwing, perhaps, the premier anglers’ retreat annually up in Grand Lake Stream, Maine, and he’s just as adept at reeling in long term gains and netting wealth preservation by taking a no short-cuts, thorough top-down approach - deftly integrating macro themes, interest rates and the like.

David’s an outspoken razor sharp guy and the analysis Cumberland produces is top notch and thought provoking. He will, fortunately for our readers, be sharing his research with us regularly in this space.

Bumpy times for bitcoin
After an extended period of relative calm, bitcoin has experienced some considerable swings to the downside over the past couple of weeks, and even saw its own mini “flash crash” Monday. For a brief moment on the BTC-e exchange, the value of bitcoin plummeted to $309, although it quickly recovered from the drop some speculated had been linked to margin trading, which the exchange introduced in November. Meanwhile, the Coindesk Bitcoin Price Index tumbled $60 to a low of $435.60; it has since recovered to trade at around $480 on Tuesday afternoon. This was the first time since May that bitcoin saw its trading price go below $500. Lesser-known cryptocurrencies litecoin and darkcoin were also hit during Monday’s rout.There was no one particular peg to Monday’s downward movement for bitcoin, although the price has seen declines since July, when New York became the first state to propose firm regulations for cryptocurrencies. Last week the Consumer Financial Protection Bureau also issued a warning on bitcoin, noting, “Virtual currencies may have potential benefits, but consumers need to be cautious and they need to be asking the right questions.”This kind of volatility is not exactly new to bitcoin, which last year saw its prices hit a peak of around $1,150. Traders may be used to navigating such movements, but they may be more disconcerting to the average consumer looking to use bitcoin as currency to purchase items from the growing list of retailers who accept it.  Such purchases are also complicated by the recent IRS ruling that bitcoin is property, not currency, and therefore subject to the capital gains tax. High-res

Bumpy times for bitcoin

After an extended period of relative calm, bitcoin has experienced some considerable swings to the downside over the past couple of weeks, and even saw its own mini “flash crash” Monday. For a brief moment on the BTC-e exchange, the value of bitcoin plummeted to $309, although it quickly recovered from the drop some speculated had been linked to margin trading, which the exchange introduced in November. Meanwhile, the Coindesk Bitcoin Price Index tumbled $60 to a low of $435.60; it has since recovered to trade at around $480 on Tuesday afternoon. This was the first time since May that bitcoin saw its trading price go below $500. Lesser-known cryptocurrencies litecoin and darkcoin were also hit during Monday’s rout.

There was no one particular peg to Monday’s downward movement for bitcoin, although the price has seen declines since July, when New York became the first state to propose firm regulations for cryptocurrencies. Last week the Consumer Financial Protection Bureau also issued a warning on bitcoin, noting, “Virtual currencies may have potential benefits, but consumers need to be cautious and they need to be asking the right questions.”

This kind of volatility is not exactly new to bitcoin, which last year saw its prices hit a peak of around $1,150. Traders may be used to navigating such movements, but they may be more disconcerting to the average consumer looking to use bitcoin as currency to purchase items from the growing list of retailers who accept it.  Such purchases are also complicated by the recent IRS ruling that bitcoin is property, not currency, and therefore subject to the capital gains tax.

Jim O’Shaughnessy’s Awesome “What I’ve learned” series

yahoofinancecontributors:

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O’Shaughnessy Asset Management’s Jim O’Shaughnessy drops more knowledge in a week, then some people ever manage to gather in a lifetime.

Witness his recent mullti-part series running on his Tumblr over the past week titled What I’ve learned in 30 years of investing.

Here a listing of the five parts for your reading pleasure. If you’re serious about investing and building wealth wisely over years, you’ll probably want to have a good read.

Part 1: Always use time-tested strategies

Part 2: Ignore the short-term

Part 3: Dig deep

Part 4: Never us the riskiest strategies

Part 5: Insist on consistency

We’ll add to this listing if and as Jim adds to this series.

Legends of the financial blogosphere

yahoofinancecontributors:

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Today we welcome 3 new Yahoo Finance contributors.

This is really special too because all 3 of them are bona fide leaders of the investment web and have deservingly earned reputations as legends of the financial blogosphere.

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Barry Ritholtz is, perhaps, the most read financial blogger of all time, penning daily at The Big Picture blog. His witty yet cutting style brings light to everything from the macro-economic landscape to the inequities of Wall Street. 

Barry is the chairman and CIO of Ritholtz Wealth Management. He’s also a columnist and radio show host at Bloomberg and his book, Bailout Nation, is a definitive read on the financial crisis.

You can find Barry’s Tumblr, The Little Picture, HERE.

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Abnormal Returns’ Tadas Viskanta is the preeminent curator of the financial web and really invented the smart link-fest that most every financial media outlet attempts to imitate. Tadas is the tastemaker who has discovered more talent than Jimmy Iovine and he serves it up daily for your clicking pleasure.

Tadas’ book, Abnormal Returns: Winning strategies from the front lines of the investment blogosphere is as Jim O’Shaughnessy put it - “a gift that will save you thousands of hours of research and maybe more.”

You can find Tadas’ Tumblr HERE.

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David Merkel is the Cal Ripkin of investment blogging. He gives you more quality analysis daily than seems humanly possible and we’re convinced that if fledgling investors did nothing else but closely read The Aleph Blog daily, they would become investing experts over time.

David runs Aleph Investments, an investment management shop, in Maryland and is an actuary by training, which surfaces regularly on Aleph Blog as an astute attention to risk management.

Welcome gentlemen! Amazing to have you as a part of Yahoo Finance Contributors.

Even Warren Buffett Gets Killed in the Stock Market

bencarlsonyahoofinance:

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Yesterday Warren Buffett’s Berkshire Hathaway stock price broke $200,000. Buffett’s performance over the years is an amazing feat.

Since 1980, when the price was in the $200-300 range, the stock has compounded at an annual rate of 21% per year. That’s good enough to double your money every three-and-a-half years.

But those returns didn’t always come easy to Buffett or his investors. There were times when his patient style of value investing was out of favor and the stock experienced large losses. Here are the biggest losses in Berkshire Hathaway stock since 1980:

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It’s hard to believe when you see the size of his returns, but every six to seven years Buffett suffered a large double-digit loss.

In one of Buffett’s most famous quotes on investing in the stock market he states, “Unless you can watch your stock holding decline by 50% without becoming panic-stricken, you should not be in the stock market.”

This is an unfortunate reality that investors in risk assets need to understand.

It’s unrealistic to assume individual investors should expect to see the same outsized returns that Buffett has earned over the years. But it’s also unrealistic to assume that it’s possible to make money in the stock market without occasionally seeing large losses. You can’t earn the rewards without accepting some risk.

Photo: JD Morris

(via yahoofinancecontributors)