Ignore Brokerage House Titles

Ignore Brokerage House Titles

By Brendan Magee

Go into a bank, a financial services company, a brokerage firm, etc. to have a conversation about your investments and  there’s a very good chance the person who greets you will give you their card which reads senior account manager or vice president equity strategist or some other very prestigious sounding title. The title makes you feel as if you are talking to someone with a lot of credibility. This is a person who you should pay special attention to. That is the only purpose of the big title, to get your attention. It doesn’t mean that vice president knows anymore about investing than you.

Last week a national publication ran an article titled, “Experts Agree: Get Over Your Fear and Get Back Into Stocks.” The experts were five brokerage financial services executives who were either the CEO of their brokerage house or chief equity strategist of huge firms. Again you would think given their titles these were people with a lot of investment expertise. However, a little analysis of their recommendations and few key questions reveal there isn’t any expertise in their investment picks. Matter of fact, it would be extremely dangerous to follow their advice.

The experts were encouraging investors to get back into the market for 2011. Their confidence was buoyed by the previous two years which provided investors with a nice rebound. What they never address in the article was the damage investors did to themselves by getting out of the market in the first place. No attempt was made to make sure investors who panicked and got out of the didn’t repeat it in the future. The fact that those who got out sold low nor to the fact that those getting back in after two straight years of rebound now are buying high was completely ignored. There was no attention paid to the returns that have been missed by being out of the market over the last two years. Success or failure according to these executives comes from being in the market at the right time, not the investor’s prudent or imprudent behavior. A complete misrepresentation of academically proven facts.

There’s also a dangerous strategy being promoted by these executives, and that is market timing. “But now that we’re seeing  that the U.S. economy has some traction, and the likelihood of recession is remote, it’s time to look again at so-called risky securities like stocks….” This is part of a quote from an executive of Goldman Sachs and clearly it is promoting market timing. This is a strategy that makes it imperative that an investor be able to predict the future accurately at least twice, knowing exactly the time to get in the market and when to get out. Note that the Goldman executive is only making this statement and given her outlook after 2009 and 2010. It’s speculation and it’s a waste of time for investors. All you had to do to take full advantage of the rebound was not panic and get out in the first place.

Each of the executives gave their stock picks for 2011, a one year time horizon only. Stocks are universally known as a long term investment, not short term. So not only are investors being talked into gambling and speculating with their money via market timing, they’re  being misled with regards to the time horizon needed for stocks. This lays the ground work for the buy high/sell low tragedy to go on indefinetly.

Lastly all the executives are directing investors towards U.S. Large stocks. There isn’t any conversation about diversification, the one thing that would have saved an investor’s bacon in 2008. If you hadn’t learned your lesson about diversification from 2008 or the tech stock crash of 2000 to 2002, you’re never going to learn it. How come these experts are completely ignoring diversification?  It’s unbelievable that these so called executives would ignore the importance of diversification or at least talk about the danger of being poorly diversified. One executive’s recommendations would have an investor putting 80% of their  money in U.S. Large Stocks. All of it in individual stocks taking two to three times more risk than if they owned those same stocks in an index.

Unnecessary speculation, buy high/sell low, no diversification, short term time horizons, it just doesn’t seem as if these executives know a whole lot about prudent investing. Kind of makes you wonder how they were given their titles or if the title means anything at all.

Brendan Magee is the president and founder of Inevitable Wealth Coaching located in Drexel Hill, Pa. With questions or comments call 610-446-4322 or email Brendan@coachgee.com. Tune into his radio show, The Investor Coach’s Show every Sunday at 10:30am on am1340 WHAT.