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Book now at FijiAirways.com. From here to happiness, flying direct with Fiji Airways. Radical Personal Finance, episode 14. Welcome to the Radical Personal Finance podcast. Today is July 7, 2014. I'm your host Joshua Sheets. And on today's show, the question that we will be dealing with is, with the market at an all-time high, should I wait for the market to go down to invest in stocks?

Stay with us. Today we deal with one of my favorite questions, which is exactly this one. Should I wait for the market to go down to invest in stocks? And with today being July 7, 2014, let's see, as I read this right now, I'm recording at 2.09 p.m. today.

And the Dow Jones Industrial Average, according to Google Finance, is at 17,023 points. And in case you didn't pay any attention to investment news over the weekend, closed at an all-time record high on Thursday, last Thursday before the Fourth of July holiday, at 17,000 points. And so any time you read, and the S&P 500 and the NASDAQ also are doing and have done very well.

But the Dow is what captured all the news over the weekend. So any time that we are dealing with market high points, we get to deal with the questions of what should I do with my money because of the market high. And today, I'm going to set you free.

My goal of today's show is to set you free from most of the market commentary and talk about when it matters and when it doesn't matter and how you can figure out what applies to you. So stick with us for that show. Before we begin, a couple of quick just announcements and updates on the show.

First of all, thank you for listening. I am starting to see several of you listen more and more, and I really appreciate it. I want you to know that I appreciate each of you who is listening. It means the world to me. I love to teach. I love to teach this stuff.

I love to talk about this stuff. And I just really appreciate every single one of you who takes time out of your day to spend time with me. I know that I can go on for a long period of time sometimes, and I know that if you're listening to all of the shows or for the full length of the shows, that you are investing a substantial amount of your time.

And my hope is that this investment will pay off for you in untold multiples, in spades as the saying goes. I hope that you receive untold multiples of your investment of time here with me. And I hope that day by day, as I start to learn how to do this a little bit better, I hope that day by day I can bring you quality information that's really going to make a substantial difference in your life.

This week is going to be our first full week of doing the show. So last week we launched on Tuesday, we did three shows, one on Tuesday, Wednesday and Thursday. We were planning to record a Friday show and sat down to do it, but it was actually about 20 minutes in and it just fell flat.

And I didn't feel it was good, so I hit delete, stopped the recorder, hit delete, and went off with my family and enjoyed the Fourth of July holiday weekend. And I hope that you did as well. But today being Monday, we're going to release this show. I would like to get on kind of a flow of weekly shows.

I don't want to box myself into a specific schedule of this is what it's always going to be, but in my mind I'd like to do a couple of interview shows per week. I'd like to do some current events commentary. I'd like to do some teaching on some financial planning topics.

And I'd like to answer your questions and listen to your feedback and just talk through the issues with you. I really want to engage you, the audience, in the show. I'm still working on getting the technology worked on to do the interviews. I could do an interview, obviously. I've done some in the past.

But the problem is I'm trying to get a little bit better audio, and I'm having some computer issues that I'm working on to get my better microphone and the recorder working with Skype. So I've ordered a piece of gear that should be here, and I'm hoping this will help me.

I've reached out to a couple of people to try to help me with it. I'm not such a techie, so I'm trying to get that fixed. I've got a lot of people that I'd like to bring you some exposure to. Some of them I've spoken to, and some of them I need to reach out to them as well.

But I'll bring you some technology -- excuse me -- some interview shows just as quickly as possible. In the meantime, on Friday, I'm hoping to do a listener question show. And so please go ahead and send me a question. In the future, I'd like to get a voicemail feedback line set up to be able to send in those, but I haven't quite got that taken care of yet.

So in the meantime, send me an email if you've got a question or something that you've been dying to ask. I'm Joshua@radicalpersonalfinance.com, and I will incorporate those into the show. I'm sure I will go out and, in order to supplement, since we're still kind of going through the process of getting the word out there, I'll go out and try to deal with maybe some FAQs, some frequently asked questions that I've often heard over time.

And maybe I'll go through and look at a couple of my favorite forums, Internet forums, see if I can find some questions that people are asking. But I thank you just for being here at the beginning. Still working on getting relisted, getting listed in iTunes and whatnot. I had submitted a feed previously, and so you may get that feed coming in, but then when I took the show down, I had to delete that feed and try to get the new feed in iTunes, and I've been working on that over the weekend.

So I hope to be back relisted in iTunes. If you have a problem with the feed, if the shows disappear, please go in, check in iTunes or whatever podcast directory that you're listening to, and resubscribe. I'm adjusting a couple of feeds, so I should be there in a day or two.

I'd love it if you tell someone about the show. Probably best to wait until we're listed in iTunes, but I would love it if you would tell somebody about the show. And then also, since we're listed in iTunes, I would appreciate any reviews. Good, positive, great, you know, tell me Joshua you're doing a great job, that's awesome.

Tell me Joshua you're doing a horrible job, love that. And tell me Joshua you're doing a mediocre job, that's fine as well. I will read all of those and appreciate each and every one of them. There will be a link in the show notes, which by the way, I noticed that iTunes has just made a change with their -- I use the Apple podcast catcher, the one that's just native for the iOS devices.

And they've made a change where now they're allowing hyperlinks. So if you'll check the show notes, which the way you do that is if you're listening on an iOS device, just click the -- press the logo and it'll pop to the show notes. And at the bottom of these show notes, there will be a link to leave an iTunes review.

And would love it if you'd leave a review. That would be great and hugely appreciated. You know, certainly finding -- still working to find my voice. I'm pretty challenged with the daily amount of what needs to be done for the show, and then also for all the other projects that I have going on in addition to the show.

But I'm here for the long term. I'm committed to this. I told my wife, I said, I'm going to do 1,000 episodes. So if I can't -- if I can't -- I'm going to do it for 1,000 episodes. And if five or ten people listen, that would be great.

I'll work to -- I'll feel really good about sharing the content with five or ten people. I'm hoping that a few more than that will tune in over time. But I certainly am still just working to find my voice. And, you know, I was listening to one of the shows from last week and was a little disgusted with the number of ums and ahs.

So I'm working today to do a better job with that. Some days I -- it's so easy to feel like, well, there are other people that are better qualified for this than me. There's other people that do a better job with it. But I just don't see anybody doing it in the way that I think it should be done.

And just giving good information, talking through things, exploring the nuance to help people be educated. I just don't see anybody doing it. And so I'm going to do it. And I thank you for staying with me along the ride. So let's jump in. Dow hit 17,000 points -- closed at 17,000 points.

It previously hit 17,000. But the Dow Jones Industrial Average closed at over 17,000 points on Thursday right before the holiday. And any time you have a new market high -- this was a new market high coming up from the previous market high. I think it was 16,000. It hit a few months ago.

I don't pay much attention to it on a daily or even on a weekly or monthly basis. But I think it hit 16,000, which was another record previously. So closed at 17,000. And here are the four article titles that you can always predict when general stock markets hit a new record high.

Number one article is "Stocks have more room to run." "The bulls are continuing." And the number two is "Stocks are going to go down. There's a bubble. And the bears are going to win. The bulls are stupid." Number three is "Here's why you should still invest even though stocks are high." And the number four is "Here's why you should not invest when stocks are high." And these are the four articles that you're constantly going to read.

So this morning, just for fun, I popped over to Google News and I plugged in "stocks" and I plugged in a couple of words that would make these articles pull up for me. And here are the articles, each of them written as predictably so. Here are all of the articles.

So the first one, "Stocks have room to run." "Today, updated July 4 Wall Street Journal headline, 'Stocks are picking up speed.' Sub-headline, 'Dow Top $17,000 for the first time and many investors bet the 5-year bull market has more room to run." And you go down and you read through here and you see, "The market's going to run." Next one here is a CNBC article.

And so here would be, this one is from July 3, Thursday, so this was actually right before the $17,000. This one is titled, "Why U.S. stocks aren't overvalued yet." Written by Leslie Schaefer for CNBC. And, okay, normal article. I feel bad for the news organizations that have to constantly produce article after article, which eventually just really doesn't seem like it says much over time.

So there's your positive news. Stocks aren't overvalued. Stocks are going to run. And now let's go and look at the bears. So my favorite gloom and doom website is Zero Hedge. You can always count on reading some good gloomy forecasts over there. So go over to zerohedge.com and it just flips through the first couple of pages here, just from over the weekend.

All the articles that they posted over the weekend. And this one is from July 7. "Stocks tumble, give up all the 'great' jobs, report gains." Here, "Nothing's cheap anymore," is the article. And here's the one paragraph article. This is good. "Day after day we are bombasted with asset gatherers, academics, and status quo huggers demanding we BTFATH." I'm not sure what that -- I've got to look up that acronym.

I don't know what that acronym is. "Demanding we BTFATH as 'stocks are still cheap.' Some have even deferred modestly to the old standby, 'stocks are fairly valued,' in a last lame effort to save what credibility they have left when they look themselves in the mirror. The fact is, no, stocks are not cheap.

As we pointed out here, they are more expensive than at the peak of what Jim Bullard called an 'obvious bubble.'" Links to a separate article. "However, still, the shrill call of 'stock pickers market' rings out to encourage the placement of hard-earned savings into easily commissioned AUM," which stands for assets under management.

"The fact is, as the three charts below show, nothing is cheap. Nothing. There have never been so few, almost zero, stocks that are 'cheap' based on historical valuations." Another one here, the article linked to, "Stocks are officially more overvalued than during the last bubble peak." And here's another one of my favorites.

Basically, the headline of this one is that, "Current wealth is transitory, and the risks of failing to act should not be underestimated." So, here are your pessimistic articles, all lined up for you. And then you can go on and you can search out the other articles of what should you do about it.

So, Wall Street Journal article, "With stocks so high, should investors move to cash?" Discussing that. And you can find these, look for these over the next week or two. They're going to be everywhere. And this is just the ongoing trend of the investment news that you read every single day, if you read it.

So, what on earth do you do about this stuff? Today, my goal is to set you free from the fear and worry of market highs. And the fear and worry of the financial news, these kinds of articles. And the key to being free is personal education and understanding. Generally, people fear what they don't understand and what they're not confident in.

But if you are well educated in the topic, and you're confident in what you're doing, you generally don't fear something. Imagine if you're a standard US-American person, you constantly spend a lot of time in the car, you drive every day and you have no problem of driving down the interstate at 75 miles an hour.

You have no problem with that. But imagine if you came from the proverbial jungles of wherever, and you'd never seen a car, and someone plopped you into a car at 75 miles an hour cruising down the interstate. That would be an extremely fearful scenario, right? I remember you read news articles about how people thought in the past when railroads were first being built up, how people thought that if you went over 35 miles an hour, that the human body couldn't handle going over 35 miles an hour.

And now we say, well, there may be a limit somewhere, but we can certainly handle going hundreds and hundreds of miles per hour. And we seem to do well under that. So the first thing in my opinion to remember is that the news thrives on attention. If a news article cannot draw your attention, it doesn't work.

News is news precisely because it's abnormal. If all the news did, if I were writing financial news articles, I would come every single day, the article would read something like this. "Today, stock market prices wandered around randomly for a bunch of reasons that nobody really understands because they're all individual to the individual players involved.

But in general, the trend was up, down, or such and such. And here were the closing numbers at the end of the day." That's about it. But the problem is that that would be the honest way of saying it. That would be the actual truth, the truth of the fact that stock prices wandered around randomly, and nobody really knows because there are millions and millions of people.

No one really, really knows why. Because there are millions and millions of people involved in the market every day. And each one of them has their own individual goals, their own individual strategy, their own individual purposes. And there are so many, when you start looking at things, there are so many different things that can move prices, you start to just become numb to the whole thing.

Now, I do want to be careful with what I'm saying. It does seem that certainly you can see impacts of major events on markets. I wouldn't go so far as to say you can't see that. But remember, for every buyer there's a seller. And that's one of the big ones.

We'll come to that in a moment. But that's one of the big ones that people forget. For every seller there's a buyer. So there's a counterparty in every single transaction. News, fear and greed sell. Fear and greed both are some of the most effective ways to sell. But fear actually sells more.

People always do more to keep from losing, especially money, than they will to gain. And so anytime you can sell to fear, it's one of the most effective tactics. And so that's why you see people get this fearful frenzy and do stupid things. And this can be manipulated. And this is especially true in markets.

And it's especially true when people don't truly understand markets. I should probably begin any discussion on markets with the caveat that I don't have a market outlook. Well, actually that's not quite true. I don't have any kind of short-term market outlook ever. And I am not a brilliant investment manager.

And I personally think it matters very little. It matters very little what happens in the short term of any kind of market outlook. I do have a long-term market outlook. And I'm actually an eternal bull. And I'll explain why. I believe that over time, well-run financial markets will always-- well-run companies will always increase in value.

And the reason is that over time, people always improve their situation in the long term. There has never been a period of history at which it's been better to be alive than today. Period. There's never been a period of history at which we've had more advantages to us than today.

And people will always work to improve the things in their lives that they don't like. Now, that improvement is usually uneven. There may be up, up, up, down, down, up, up, down, up, up, up, down, down. But generally, the long-term trend is up. And the way that people do that is they work together.

And in our system, we have a capitalistic-based system which rewards those who do better and improve the world with things called profits, profits measured in the form of money. And the people that work together, they form companies. And as those people work together to meet the needs of the market, they make a profit.

And as they make a profit, they give that profit to their stockholders. And if the company is unprofitable, it will close its doors, and it will be replaced by somebody who's able to do it better, more efficiently, and to provide a better service. And that's always the way history has always been.

And I've never found any rational reason to believe that it wouldn't always be like that in the future. Any history of the world that I've ever been able to read through illustrates that people always improve their situations over time. And companies and owners of companies accrue wealth. Now, there can be lots of hiccups.

There may be a war. There may be a financial crash. There may be major economic problems. There always are. But even those times are tremendous opportunities for people. And so the key is to be able to identify those things when possible and take steps that are going to position-- I want to take steps that are going to position me to profit in the good times and in the bad times.

And I believe that's done through sound financial planning. And I'll explain more a little bit about that within the context of this conversation in a few minutes. So with all of these articles, the problem is that all the fear articles are basically irrelevant to 85% of the general U.S.

population. They're only relevant to less than 15%. You say, "Why that number?" Well, it's because 85% of the general U.S. population doesn't own stocks. Now, you might be wondering how that's true, because most people seem to own something, whether it's through the context of a corporate pension plan, such as a 401(k) or their IRA, or a health savings account, or something like that.

But here's why. 85% of the public doesn't own stocks, because 85% of the public doesn't invest in individual stocks. Only 15% of the public does invest in individual stocks, and I'm citing for that Federal Reserve data. Feel free to check me out and fact-check me and make sure that I'm correct.

So the market news is completely irrelevant to the 85%, and it's actually irrelevant to most of the other 15%, because of the 15% who do own stocks, of those numbers, 20% of them own one company, so that's 8% of households, and 53% of those 15% own between 2 to 9 companies.

And so there's only a total of 3% in total of the U.S. population that owns greater than 10 individual stocks, 10 individual companies. And when you look at that data, you say, "Why would the Dow Jones Industrial Average at all-time high affect someone -- that's 30 stocks -- why would that affect somebody that owns 2 to 9 firms?" It doesn't, really.

In one sense, it does. Of course it does, because you have a general trend. Yeah, I'm aware of that. But it doesn't affect their holdings. So this really affects about 3% of the U.S. population. And yet, you would think when you read an article, or you see it on the front page of the news, or it leads the evening TV news, you would think this affects everybody.

It doesn't. Now, what about the people that invest through other things, except through other vehicles, more than just individual stocks? Well, that's valid. And that would be about 50% of American families do own some kind of stock through a fund. Through some kind of fund. And that's going to be a major part of what we're going to talk about today.

So I've come up with basically what I think are three ways, three steps, to set yourself free from the tyranny of the financial news. To understand, number one, the vast majority of people don't own stocks. They own other financial instruments, which have stocks. But they don't own stocks. And it's only 50% of the people that do own any kind of financial instrument containing stocks.

So, number one, understand that most people don't own stocks, and that probably includes you. Number two is then you have to understand your strategy. Understand the strategy of the people that you've hired to run those investment vehicles, whatever they are, and understand how that strategy might be affected by market movements.

And number three, you always need to make all decisions within the context of your own personal financial plan. And that should take into account your personal goals and your personal fears. Your personal comfort level with investments, your personal comfort level with volatility, with the ups and downs of market movements.

And remember this, the stock market is not the only place to invest money. There's no reason why you can't open up a gas station, or a string of gas stations in your own hometown. So maybe that's what you should be spending your money doing. Or open a McDonald's franchise, or a Dunkin' Donuts, or start an internet company, or build a welding company, or start a house cleaning company, or a construction company, or a products and services company, or a retailer.

There are any number of things that can be invested in. Every single one of those things is just as valid as investing in stocks. However, publicly traded stocks do have their own advantages, and we'll talk a little bit about that. There's no such thing as a stock market in this way.

The stock market is not something or someone. It's not an entity. It's not this entity that has a mind of its own. The stock market is just where people come together to buy and sell shares of their companies. And so they come together to trade little bits of paper, not paper anymore, little digits, that represent ownership in various companies.

Some large, some small, some local, some national, some international. And these are all traded together in a place we call the stock market. And so what the price of a stock represents is just literally the last price at which a trade happened between two parties. So if the stock is priced at $20 per share, all that information tells us is that the most recent trade happened at $20 per share, or that somebody is really ready to offer $20 a share for this price.

And so if you don't like that price, don't take it. If you like the price, take it. And that's what all trading is done based upon, is it's done based upon whether one person values something more than they value the money, and the other person values the money more than they value the good.

And we never know why people decide to trade. In all transactions, all financial transactions, each party is ultimately going to believe that they benefit more. So let's say that I go and I'm looking to buy a pair of jeans. And I go down to the store, and the store has a pair of jeans, and they are offering the pair of jeans for sale.

Well, if I want to buy the jeans, I have to value the jeans more than I value the money that I trade for the jeans. So let's say it's a $50 pair of jeans. I have to believe that by giving them my $50, I'm going to win. And they believe that by giving me their jeans and them getting the $50, they win.

That's it. Every transaction is based upon that. So it's exactly the same in the world of stock market, stock trading, or stock owning, or stock investing, is that one person values the company more than they value the money, and one person values the money more than they value the company.

And so we never know why people decide to trade. Some may be obvious. There may be a large investor who comes on TV and says, "Here's why I'm trading this block of shares, and here's why I'm willing to sell them and accept the money." And then someone else may come on and say the opposite, "Here's why I'm buying this large block of shares." And in today's world, with so much of the money institutionalized, where there's large companies and large institutions doing the transactions, then it becomes very challenging for these companies to make their trades anonymously.

So oftentimes you do know. You do understand what a company's outlook is, and you do understand why people are buying and trading it. But it could be from everything from the latest earnings report, heard expectations, or was below expectations, to the fact that maybe a father needed to pay for his daughter's wedding, and therefore he valued the $50,000 that he could get for his General Electric stock more than he valued owning the General Electric stock, because he wanted to pay for the wedding.

Who knows? There are millions and millions of reasons why people own stocks and trade stocks. So remember that the majority of people don't own stocks. Let's assume you do. Let's talk about your strategy. And any time you're going to be owning a stock, you should have some rationale for it.

You should have some strategy. So you're probably doing some kind of analysis on the stock. So there are basically three major types of stock analysis, and there's always exceptions to everything. How's that for a blanket statement? There's exceptions to that. There's just about always exceptions to everything in the financial world.

But in general, there's usually three different categories of stock research. One would be fundamental analysis. Number two would be quantitative analysis. And number three would be technical analysis. So fundamental analysis is usually where you're looking at an individual company, and you're giving a rating to that company based upon its individual business prospects.

So if you were analyzing a company on the fundamentals, you might look through its operations. You might take a look at its balance sheet, at its finances. You might try to figure out what its future earnings would be. And so you'd read through their filings with the SEC. You'd read through any trade journals that talked about it.

You'd read any industry interviews with the management or kind of take a look through any kind of competitive reports that you could get access to. Maybe you would go to the company. Maybe you would visit its stores. So let's say that you wanted to invest in Chipotle, but you didn't understand why everyone was crazy about it.

Well, you'd go to a Chipotle and see what the experience was, maybe talk to a few people. That's all fundamental analysis. Now in quantitative analysis, usually with quantitative analysis, you're taking a look and you're making a hypothesis. And so this hypothesis would be based upon something that you've observed, and you're trying to test it.

So maybe you said that female CEOs of companies do better than male CEOs, and so you're going to go back and you're going to try to test your hypothesis and see that. So with quantitative analysis, you're basically largely looking through a lot of data, and you're trying to say, "Is this factor and this idea that I've picked up on, is this factor going to make a difference across a large variety of companies?" And you're looking to test this out.

The third area is technical analysis. So if you're doing technical analysis on a stock, then a technical analyst would basically say, "A stock price follows a certain pattern, and this pattern is largely based upon the irrational behavior of investors." So it's not so much about what the underlying company is doing, and it's more about what investors are actually believing about companies.

So everyone jumps on, and then when it reaches a certain price point, then it jumps off. So a technical investor would call that a resistance level, and say, "This stock is reaching a resistance level at $20 per share. It looks like there's more sellers than buyers, and people aren't quite ready for this higher level." Or they might look and say, "Well, at $15 a share, it seems to be kind of a support level." And so if it goes below $15, generally investors are willing to pay more.

But this is all based not upon any underlying assumption about the company. It's more based upon people's perception of the company. So if you were trading your portfolio, you would do it based upon that. And you would understand that none of these strategies involve what the Dow is doing, what the general market is doing, and each of them is specific either to an individual company, or to a company in relation to the market, or in relation to investor sentiment.

So the only way that the Dow closing at 17,000 points matters in this scenario, is if that is one of your -- maybe that's your support level, or your resistance level for your technical trade. Now, maybe you are approaching it with the idea of -- let's say you're a value investor.

So you go through and you perform fundamental analysis on stocks, and you say, "Well, based upon my fundamental analysis, I believe the intrinsic value of this company is $15 a share." Now, Dow 17,000 doesn't mean anything to you. You're looking at your company. Or maybe you're a technical investor, and you're just, again, trading based upon those resistance levels and support levels.

If you're swing trading or day trading, well, in this situation, you're going to be just trading based upon movement. And each and every day, just moving based upon movement is really irrelevant which direction the movement is to you. And 17,000 is not that big a deal, except maybe you say, "Well, we hit that, and we're going to bounce back a little bit." That seems to be what's happened so far today.

You've got to understand your strategy. Now, those ideas were applicable to basically this tiny percentage of the U.S. general market. Most people own funds, not stocks. They own funds of stocks, not stocks directly. Well, in a fund of stock, it's even more important to understand what the strategy is.

What is your portfolio built to do? In your portfolio, you need to understand what investments are making up that portfolio. Let's say that you're a passive index fund investor. Well, if you're a passive index fund investor, you need to understand the idea behind the efficient market hypothesis. The efficient market hypothesis basically would claim that the current stock price incorporates all known information about a company.

Incidentally, you may find it interesting. There's actually three forms of the efficient market hypothesis. Whenever you're reading something about the efficient market hypothesis, it's a good idea to try to understand which version of the efficient market hypothesis you are hearing about. The three versions would be what they call the weak form hypothesis, the semi-strong form hypothesis, and the strong form hypothesis.

The weak form hypothesis would basically say that stock prices already reflect all the information that you could pool by looking at the history of past prices or trends or trading volumes or interest by people shorting the stock or things like that. The idea here is that all this past stock data is publicly available.

It's useless for you to try to look for a trend or something that's unexploited because all the data is available and it's practically free, and so somebody's already exploited it. A good example would be the dogs of the Dow strategy. Someone who claimed the weak form hypothesis would say, "Well, this dogs of the Dow trading strategy, which goes and looks at these stocks in the Dow Jones Industrial Average that don't meet these certain criteria, that are the dogs of the Dow not doing well according to this criteria." I don't remember exactly off the top of my head what those criteria were.

They would say, "Well, these are good companies to buy." A believer in the weak form hypothesis would say, "There's not really any point in doing that because now that anytime someone says dogs of the Dow, that has now been exploited to the point where there's no advantage to be gained in that situation, so don't even waste your time.

Not even worth it." The semi-strong form hypothesis would say that all publicly available information regarding the prospects of a firm must already be reflected in the stock price. That includes anything about past prices or any kind of fundamental information on how much money they're making or on new products or how good the management is or how much money they have and what their forecasts are or what their accounting practices are.

That's all done. All investors have access to the information. It's free and costless to obtain. So, therefore, there's no point in combing through earnings reports trying to figure out whether the company is doing well or is going to do better in the future. There's no point. It's already been incorporated into the price of the stock.

That would be the semi-strong form of the hypothesis. I think most people, when they actually mention the efficient market hypothesis, they're usually, in their mind, envisioning the semi-strong form. The last form would be the strong form of the efficient market hypothesis. This would say that stock prices reflect all information relevant to the firm, even including information only available to company insiders.

That's a pretty, pun intended, strong form of the efficient market hypothesis. It would say that even if you were the president of the company and the accountant and you knew that you had some challenges and you were meeting together, that the stock price already incorporates that information. I think that that one's probably the most challenging to defend.

But then again, you rarely find people that would say that. But that is the strong form of the efficient market hypothesis. We won't go into insider trading. We're going to ignore that for now. Again, I'm not saying that this is true. This is not true. My personal opinion on it is that it's important and very valid, and yet I think there are exceptions.

But again, I'm not necessarily the guy to pick on that from. It doesn't line up well. My beef with it is that it wouldn't incorporate behavioral economics. In my opinion, you certainly see times where there are things that are undervalued and overvalued based upon the behavioral herd mentality. But that's me.

And again, don't do anything with that information. That's just my opinion on that topic. So go back to understand your strategy. So assume you're a passive index fund investor. Well, necessarily, a passive investing is based upon the premise of the efficient market hypothesis. And that premise would say that the current stock price, at least the semi-strong version, incorporates all known information about the company.

Well, in that situation, if you reach Dow 17,000 or whatever the S&P 500 is, if you say, well, these are fair prices because these are the actual price of the company. Assume for a moment that price -- one thought incidentally, this is a little bit debated, but here's the way I think of price.

The price is people's expectation of all of the future earnings of a company based upon their acceptable discount rate. And so when you buy -- if you're going to buy a house from me, a rental house, then what you pay for that rental house basically would say, if I have my cost and I have my income from the house, and I take that income and I push it forward, and I include the cost of repairs to the house, the expenses, and I include my terminal value of the house, so whatever I think I could sell the house for based upon my future price, and whatever I could sell the house for in the future, then I take all of those cash flows and I back them up for today, and I say, what's the total value of all the cash flows I can accept from this property, and then what rate of return do I require from my investments, and that's how you would arrive to set the price.

Well, investors in a company don't and shouldn't necessarily do anything different if they're following a strategy that's not based upon the movement in stock price, but rather that's based upon the actual company's performance. So that's all the price is. And so you would say, well, whatever the price is at Dow 17,000, that's fine.

That's the exact price. This incorporates all the information. So if you were a passive index fund investor, then you wouldn't make any changes in your portfolio, and if you believed in that as your investment philosophy and you had a pile of money that you needed to invest, you would just go all in, go all in and invest the money because that's the fair price.

Now, if you're using actively managed mutual funds, well, then here you need to understand that you've hired people, a portfolio manager, to invest the money in what they think are good firms according to the prospectus and the strategy of the fund. So here, again, you need to allow your manager to do their job.

So if the manager -- let's say the prospectus indicates this manager is allowed to change his allocation from invested in equities to a higher rate of cash. Well, in this scenario, if your manager believes that the investment that you've made in company XYZ, if he believes that that's overvalued, then he'll be able to sell that company and move the money to cash.

And so you don't need to worry about that. Now, on the other hand, if your prospectus requires the portfolio -- if the fund requires the portfolio manager to stay invested at all times in a certain amount of -- in a certain percentage of his portfolio or within a certain market sector, so let's say you've hired a large cap value fund manager and the prospectus requires the fund manager to stay invested at least 80% of the fund assets at all times.

Well, under this scenario, this portfolio manager is only permitted to pick and choose among the large cap value firms. So he or she can't say I'm going to go to 50% in cash because I think this is overvalued. Rather, he or she is required to say I'm going to stay 80% invested and I'm just going to choose from among what I think are the best investment opportunities here.

And you need that because if you were incorporated those types of funds, perhaps you would be pursuing a strict asset allocation strategy where you would say I'm going to set these asset allocations and I'm going to stay invested at all times. I'm going to build a buy and hold portfolio along this asset allocation.

And you can't buy in this scenario if 20% of your portfolio is going to be allocated to large cap value. You can't have a manager that's going to all of a sudden sell out that part of your portfolio. Otherwise, your entire strategy falls apart. So if you don't understand your strategy, then you're going to be nervous.

But if you understand your strategy and the pros and the cons and what you're taking in and what you're giving out, then you have a situation where you actually can build upon it. So you need to understand your strategy. And if you're hiring a portfolio manager, whether that's a mutual fund manager or whether it's an individual investment manager, you need to understand what they're doing.

After all, you're paying them money. Understand what they're doing. Or if you're choosing to forego hiring an active manager and you're saying I'm just going to buy index funds, fine. But understand what they're based upon. Understand the premise of the entire -- of the philosophy. Because if you don't understand the premise of the philosophy, then you're not going to feel confident and you're not going to stick with it in times of ups and downs and volatilities.

Step three, you need to apply all of your investment decisions within the context of your individual financial plan. And I believe this very strongly. There's no one that's going to know what you should do with your money except you. Now, a good personal financial planner should probably be the most trusted advisor, most trusted counselor for you.

But even there, you know, in the past when I was working with clients, I would reach a time, I don't know what you should do with your money. Because it's your money and you've got to look at your plan. Now I'll tell you what based upon the information that I have about your plan, then this is what you should do.

But, you know, the most common example of this one that you hear that seems intuitive is time horizon. And so the idea is basically that you generally will hear, and this is valid, is that any kind of short-term need for money should not be invested in stocks. Because stocks are simply too volatile.

Any kind of long-term need for money, that would be okay. So if you were saving to buy a house and you had a target date of saving to buy the house in six months and you had $40,000 set aside, that would be an inappropriate investment for a portfolio of stocks.

That would be inappropriate because there's too much that could happen in six months that could dramatically drive the value of the portfolio. But over a 30-year period, if you're saying, "I'm going to buy a house in 30 years in retirement," that would be a more appropriate use of stocks.

So we kind of understand that intuitively. And it's true. And the key to this one is you've got to understand how meaningful or non-meaningful various prices are. Let's keep picking on Dow 17,000. Is this meaningful or not? I think it is meaningful, but the question is, "What's it going to be 30 years from now if I'm investing for 30 years?" I always love going back and looking at my birthday and trying to figure out what the Dow Jones Industrial Average is.

So I'm almost 30, and on the day that I was born-- just a second, let me punch over there and pull this up. I use a quick "Where did the Dow Jones Industrial Average trade on my birthday?" I'll put that in the show notes, so if you're interested, just check the show notes.

But on the day that I was born, the Dow Jones Industrial Average closed at 1,304 points. 1,304 points. And as I record this now, the Dow Jones Industrial Average is at--it went away. It's about 17,000. It's at 17,012. So in light of that, what does the Dow difference between 17,000 and 16,000 versus 17,000 and 18,000 matter?

It matters a lot if I'm writing news articles. It doesn't matter so much in the context of a 30-year investment time horizon. So you need to understand--go and research. What was the Dow on the day that you closed? Incidentally, I didn't mention this before, but the Dow is not necessarily a good proxy to really track for a general market performance.

The Dow is made up of 30 stocks, and it's a price-weighted average. And I wouldn't--I mean, it's valuable. It really is, but I don't--it's not the-- you rarely will find portfolios measured against the Dow because it's a pretty narrow investment philosophy. So understand what your time horizon is, and understand what your cash flow strategy is.

So you need to have a plan. If you can't handle the short-term market volatility, then have a plan for the cash flow. And as we talk more about retirement planning in the future, this is huge, is that you've got to be proactive about planning cash flow when it comes to retirement planning.

Understand what you're investing in and why. So stocks may not be appropriate for you if you've identified a good alternative investment. You can invest in just about anything in the world. So if you have some kind of special knowledge in classic cars or in stamps or in art, fine art, or in gold coins or in fast-food franchises or real estate, any one of those might be a better place for you to invest your money.

Stocks are just simply businesses, and all that a stock price should represent is a claim on a business's earnings and assets. That's it. We all have limited funds, and we need to figure out what's an appropriate allocation for each of us. And stocks are not the only way to invest.

Now, the nice thing about stocks is that they're a fairly easy way to invest. But then again, is easy always good? Is easy always the best? I would believe that many people would be better served by selling their stocks and going and buying Dunkin' Donuts franchises. And many people would be better served by getting out of business and going and buying stocks.

It's an individual decision. Remember this. There's a counterparty to every single trade. So if or when you buy or you sell, there's somebody on the other side that's betting the opposite. If I decide to sell at $20 a share, there's someone else that's deciding to buy at $20 a share.

Why? I could be right. I may have better insight into what I'm doing. Then again, the efficient market hypothesis would say that I don't, but you never know. I could be right or I could be wrong. And there's an infinite number of reasons that markets might be moving up, might be moving down.

Everyone has underlying assumptions that bias their ideas. Each person has a philosophy. If I woke up and I went over to zerohedge.com and I was interested to say, and if I read that, "Wow, investment markets have a bright and rosy future," I would be scared. I would be. I would say, "Where did my doom and gloomers go?" But on the other hand, if I surfed over to Warren Buffett and he said, "You know what, the world is going to fall apart," I would say, "Whoa, what's going on here?" You have these underlying biases and these underlying assumptions that influence your philosophy.

So try to understand what those things are. Try to understand what your biases and assumptions are, and then make a plan that's rational within that context. So as with all things in financial planning, the answer to, "Should I buy stocks or should I invest at Dow 17,000?" As with all things, the answer is based upon your situation.

And the answer is, it depends. You've got to look at your specific goals, your specific situation, and talk it through and think it through. But think it through from a comprehensive standpoint. Think it through and look for the areas where you're being irrational, and really research and understand your strategies.

So that's it for today's show. Again, today was Monday, July 17--excuse me, July 7. I hope you enjoyed the show. It's challenging to do these kinds of shows. And I tell you, it's just most challenging to be out there on the record. It's a scary place to be when you're putting your ideas out there on the record.

And I'm such a perfectionist that I see all the problems in everything that I say. And if I give my caveat to every caveat, then the show would be forever. So I've tried to avoid that, but that's a major challenge for me. Today's show is episode 14. Come by the show.

It's radicalpersonalfinance.com/14. Love to hear your thoughts and opinions on the show. Give me your feedback. Point out where I'm wrong. I would love to know that. As always, financial planning is intensely personal. So please go and talk with your own financial planner. And don't take your advice from some random guy on the Internet.

Take the information and then go and take a look at it in your own personal life. Hope today's been helpful, and would love to hear from you. Have a great Monday, everybody. And this one's done. Toyota's Black Friday deals are too good for just one day. So right now, every day is Black Friday at your Toyota dealer.

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