Sample Excerpt from the Financial Planning eBook.

There are only three ways to make investment decisions - market timing, security selection, and asset allocation. All three can be used individually, or in any combination together.

Market timing, including all forms of charting and "technical analysis," doesn't work because nobody can predict the future, period. The future prices of stocks, asset classes, or any market (e.g., interest rates), cannot be predicted from charts of past prices, wave theories, econometric models, historical trends, computer programs, statistical relationships that worked in the past, or any other method. Markets move in response to millions of people acting on random daily news by trading securities, which can't be predicted.

The main reason market timing doesn't work is because you have to make four decisions every time it's used. You would have to be correct in four calls to make high enough of a return to justify the risks.

First you have to pick what's now "up" (and will go down in the future, or why sell it?) for the sell decision to raise the money to buy what you think will go up in the future. Then you need to know when to sell it. Then you need to know what's "down" (and will go up in the future, or why buy it?), and when to buy it.

All it takes is to be wrong on one of the four calls to wipe out the profits from other three calls. The chances of all of this netting out to a profit after taxes and trading costs are slim to none.

If someone could market time with as little as 70% accuracy, they'd be on the front page of every newspaper every day, and there would be more than just a handful of firms worldwide practicing market timing. Everyone you see on TV, or in magazines/newspapers, predicting the future is just guessing. Some are just trying to convince you to buy the stocks/asset classes they just bought so they'll go up, so they can sell at a profit. It's their job to convince you that they can predict the future so they can move their products and sell their services.

Over time, their "mistakes" will lose you way more money than their lucky calls will make you money. They are rarely on the same shows for more than three years, because that's how long it takes for the producers to realize their luck ran out long ago.

This is all you need to know about market timing, technical analysis/charting, and what to believe from the financial media (when it comes to predicting the future) to be a successful investor!

Security selection (e.g., stock picking) can only be done effectively by mutual fund and other professional money managers that concentrate all of their efforts on a small segment of a market (like tech stocks). Even then, most have marginal records when compared properly to their benchmark index, unless you know how to find the good ones by screening mutual funds.

The only people who have the actual data needed to forecast a stock's future price are the people who work at/for/or with the company - and they can't tell anyone because they'd go to jail by breaking insider-trading laws. In the past, most of the time these laws were ignored, but now that the public is catching on, the cops are actually starting to do their jobs a little more.

Everyone outside the company's inner circle is just guessing with incomplete pieces of outdated estimated data. Mutual funds don't have inside information, but have the resources to be the best at guessing (they guess by putting lots of different pieces of the puzzle together from public information). Just buying a good software package for screening stocks runs around $100,000 per year and the full-time people it takes to use it are many times that.

Mutual funds can usually do it well if they stay focused on only one asset class. That's why fund objectives like Blend, Global, Balanced, All-cap, Target, Life-Cycle, Hybrid, and Asset Allocation, seldom get good results (when properly dissected and then properly compared to their benchmark indices).

Most can't maintain the focus needed to be superior stock pickers because they're trying to do too much at once (by working with more than one asset class). There's just too many stocks, too much news, and it all happens way too fast to cope with. Company news comes out of nowhere and could bring a stock down by half in days - before anything can be done about it. That's way too risky, so individuals, and pros that manage money for clients, should not waste time trying to pick stocks. But they love to do it because it's just so much fun to be a "player on Wall Street." Some do it because it's the only sales pitch they know how to tell.

It's humanly impossible to find the time, money, and other resources needed to both manage clients' assets in a way to get the results clients need and expect, and keep up with thousands of stocks on a daily basis. Some may get lucky here and there, but over time the losses of their "mistakes" will greatly outweigh their lucky picks. Successful professional stock pickers either make their own mutual fund, or are hired by mutual funds, because that's where the real fun and money is.

The biggest problem with security selection is knowing when to sell. You don't need to be a CFA Charterholder to know when a stock you've been following will go up. Just wait for accelerating earnings growth - stocks usually go up then. But that's usually when they are at peak prices. This is usually when people buy because they feel "it's safe now that it's going up."

But that's usually when it's the best time to sell. Nobody wants to sell anything that's going up, especially when it's a "great company," so they wait to try to get a few more bucks out of it. That's when it goes back down before they can sell it. Then the investor goes into denial - which usually results in holding it forever because they don't want to take a loss.

You want to buy stocks when the news is bad, and sell them when the news is good. But this is the opposite of what most people actually do in the Real World. So the returns do-it-yourselfers and lone wolf professional stock pickers get are usually less than good mutual funds. Mutual fund fees are just not that high to justify hiring low-cost novice stock pickers.

Recommendations by "research departments" of major brokerage houses rarely get superior results because their stock picks are frequently biased toward firms they have investment banking relationships with (they are under constant pressure to move stock and bond inventory on the deals their firm underwrote). Hopefully the cops will actually do something about this someday.

Then there are the conflicts of interest with analysts who give stock recommendations. They can really only give various versions of "buy" recommendations, or the company will get mad and stop giving them financial information. And they're not going to tell you when it's time to sell a stock their firm has other (investment banking) relationships with, because they'd get fired for not being a team player. They also don't like downgrading stocks because it makes them look stupid for recommending it in the first place. The regulators are making progress with this, but it's still years off, and may never happen at all.

Here's an example: Enron. CSFB's analyst had a strong buy recommendation on Enron just five days before it declared bankruptcy on 2 December 2001. JP Morgan - just four days. JP Morgan and Lehman Brothers analysts were both "locked into their buy ratings" because they were involved in the Dynegy merger (classic investment banking relationship conflict of interest). All three major bond rating services (Moodys, Fitch, and S&P) had above investment grade ratings on Enron's bonds, also just four days before they declared bankruptcy.

Even gurus like Jim Cramer that have their own TV show are just guessing. On the first week of March 2008, he said to not sell Bear Stearns, after reading a concerned viewer's letter which read, "Should I be concerned about Bear Stearn's in terms of liquidity problem, and get my money out of there?" Cramer replied in his usual tirade, "No no no! Bear Stearns is fine.... Don't move your money from Bear, that's just silly...." The stock went from $80 to $2 overnight two weeks later (and was $171 a year before).

These kinds of things alone should be enough to convince people that stock pickers are not to be relied on for anything but recommending stocks they already own (so they will go up so they can sell at a profit, while non-fee-paying-clients who bought it on their TV recommendations are left holding the bag), and doing everything possible to protect the huge fees earned on investment banking relationships. They are not always out looking for good stocks for clients to buy, and there's too much conflict of interest, so they should not be relied on to pick your stocks

You don't need to spend hundreds of hours researching this - just look at any market timer, technical analyst, lone-wolf stock picker, private money manager, or brokerage firms' long-term track record (over three years) and see for yourself. They may have had a lucky year here and there, but it's long-term average that matters (see how much they lost compared to the S&P 500 in 2000 - 2005, if it's more than a couple of percent more, then that's a big problem).

Asset allocation is the only thing that works for people who manage money either for themselves, or for clients. It's the art and science of determining how much of the dozens of assets classes people should own (based on their life situation). Then one just holds the mix until a major life factor changes.

Then you just find good mutual funds to represent each asset class. Mutual funds are best suited to market time and pick securities (somebody has to do it unless you want to use index funds, which by definition just gets average results).

Yes, asset allocation is very boring, and you're guaranteed to never double your money in one year, but it will also get the best long-term results.

There is a lot more to read like this for free here and here. But most of the great content is in the Money eBook.

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