How About A Warning Label For Investors?

How About A Warning Label For Investors?

By: Brendan Magee

Everywhere you look there are warning labels that make consumers aware of threats. They are designed to help people avoid activities that through research have proven to be detrimental to their well being. The Surgeon General’s warning is on all tobacco ads and packaging. Drug companies are required to detail the possible side effects in taking their medications. Toy companies have to let you know if a toy is appropriate for the age of your child. I am curious why investors aren't given the same consideration?

I had this thought when I was sent an offer to receive a brokerage company’s free brochure. This company touts their 20 year track record of dealing with high net worth individuals (portfolios of $500,000 and up). They’re also very proud of their transparent fee structure and how that puts them on the same side of the table as their clients. They offered me their free Stock Market Outlook report which would include their views on:

-How the elections would impact the market

-What third quarter results could mean for fourth quarter returns

-How investor sentiment may impact the market

-Which economic issues I should most be concerned about

That and much, much more would be contained in this free report.

Within these proposed  benefits,  and in the thousands of pitches investors receive every day is where I say  investors should receive the same consideration as smokers and people who take prescription medications. The average person works hard to earn a living, pay their taxes, educate their children, build a little savings, and then provide for their retirement.  Certainly the public’s welfare is put to risk when investors are goaded into investing their money for retirement and their children’s educations via wasteful strategies.

  In the Prudent Investor Rule  there is as strong a warning label as can be written. Bargain shopping in an effort to identify winners and exclude losers through forecasting of performance is simply deemed wasteful. The Prudent Investor Rule was written back in 1990 and is based on the Nobel Prize winning research of the University of Chicago’s Harry Markowitz. His research became known as Modern Portfolio Theory and is believed to be as groundbreaking as Sir Isaac Newton’s theories on gravity. The Prudent Investor Rule is the basis for the laws that prevail over money that is invested in trusts and retirement plans.

The benefits of the report are entirely rooted in forecasting and speculation. The words that are used, would, may, should, and could are all in use and pertain to how the market will perform in the future. Could you imagine if this brokerage house had to put below their claims, the Chairman of the Security and Exchange’s warning, Bargain shopping in an effort to identify winners and exclude losers through forecasting of performance is deemed wasteful.  Certainly they would lose a lot of their credibility, and many investors in seeing the warning would avoid investing that involved forecasting and speculation.

This forecasting of returns extends to what people would consider conservative investments as well and has had a tremendous negative impact. In 2009 the Dalbar Corporation published a report documenting the annualized rates of return for the average mutual fund investor  from the year 1991 through 2008. Mutual fund investors achieved a dismal 1.77% annualized rate of return in that time. They didn’t even keep pace with inflation for that time period. How many funds don’t lure investors to their funds without the use of track records?  Aren’t investors led to believe that the ones with the best five, ten, and twenty year track records are going to be the winners in the future?

So here’s the crux of the situation. If you choose to smoke cigarettes in spite of the warning labels and your health suffers as a result, there’s no one to hold accountable but yourself. If you choose to buy a toy for your child that warns that toy is for children age 10 and your two year old is injured playing with that toy the responsibility is the parents. People can’t be responsible for things until they’re made aware of them. I think if investors were given the benefit of a warning label it would go a long way towards helping investors become more responsible for themselves and avoid destructive strategies.

Brendan Magee is the founder and president of Inevitable Wealth Coaching. Should you have a question, comment, or suggestion for a future article call 610-446-4322 or send an e-mail to Brendan@coachgee.com.