Investors Getting Right Answers To The Wrong Questions
I think we have all had the frustrating experience of asking someone a question, and sometimes asking the same question multiple times, and getting a response that just doesn't answer the question you'd really like to have answered. A woman I am working with, when she went to discuss some problems she was experiencing with her 401k plan with her benefits manager got answers to questions she hadn't even asked. The answers she got were the right answers to the wrong questions her benefits manager, merely, perceived she was asking.
If Diane had asked the question, what's my fund's returns year to date? 10% would have answered the question correctly. If she had asked the question, where does the fund I am investing in rank amongst its peers? In the top 15%, would have been the right answer. Unfortunately, those weren't the questions Diane was asking at all and neither the benefits manager or Diane are getting answers to the questions that would reveal the real problems that are prevalent in their company's 401k plan. Frankly, both Diane and her benefits manager are in the same boat, they are both getting the right answers to the wrong questions, so please do not read into this that the villain here is the benefits manager. They are both victims.
In doing an analysis of Diane's 401k plan we saw that 62% of her money is invested in U.S. Large Company Stocks. This was a fund that when she enrolled in the plan, the rep told her, was designed to be allocated for someone in her age range and length of time to go before retirement. Rather than getting answers to the questions, What investments should my money go in, or are these funds any good, Diane and her benefits manager need to be asking other questions. They'd be much better off if they would ask questions like:
-How does the market work? Where do market returns come from?
- How can I get a mathematical measurement of just how diversified I am?
-What's the mathematical measurement of risk for the investments I am considering?
-What's the long-term expected rate of return of the portfolio I am considering?
In asking those questions, Diane, her benefits manager, and every other investor would be asking the questions that would put them more in control of their investing. They wouldn't put so much stock in rates of return or rankings, things that mean absolutely nothing in terms of making good investment decisions. As it is Diane's benefits manager is giving her assurances in a fund that has way more volatility than she had previously been aware of. Over the course of the past 40 years her current portfolio has, on three occasions, taken a loss of 30%. She is, also, taking a lot more risk than she has to for the long-term expected rate of return of her portfolio. What good will a five star ranking do her when she experiences a 30% loss? Besides her, who else in the company's plan is walking around completely in the dark about their 401k plan?
This situation isn't exclusive to Diane and her benefits manager. Pick up a magazine, watch an investment commercial on television, or any literature from an investment company. The mutual funds are ranked from best to worst performing. The awards they've been given are proudly displayed and touted as the reasons you should invest your money with them. These are the answers to questions like, what did the fund do over the last one, five, or ten year periods of time or who should I hire to manage my money this year? These are answers that give a sense of credibility to the investment companies which makes it easier to sell their funds. They don't make it any easier to be a successful investor or gain confidence, clarity or peace of mind. These are the wrong questions to be asking and there is a terrible cost to be paid for making decisions after having asked the wrong questions.
Brendan Magee is the founder and president of Inevitable Wealth Coaching. With questions or comments call 610-446-4322 or e-mail Brendan@coachgee.com.