Monday, April 11, 2011

Don't Assume Your Broker Knows

Don’t Assume Your Broker Knows
                                                                                By: Brendan Magee
A financial advisor located in Princeton, N.J. e-mailed me that she would like to be a guest on my Investor Coach’s Show. She e-mailed me that she had been named to the Top 100 Wealth Managers in New Jersey. She felt as though hers and my philosophies were very compatible and that she would make a nice fit for my show.  
We had a really nice introductory conversation, but I was pretty sure going in to the conversation she really didn’t fully understand what I was committed to for the Investor Coach’s Show. I pointed out to her that my show was about helping people avoid the problems created by traditional financial planners. I told her I believed that stock picking, market timing, and track record were akin to gambling and speculation. I told her I felt that the investment industry was putting their interests ahead of the investor’s in promoting these strategies. To which she said she agreed.
  During our phone conversation I asked her a few more questions about her background, and then asked her, when she gets done working with a client what was an investment she felt good in recommending. She told me that she likes the Templeton Growth Fund, and for me a big red flag popped up. This was not a fund that adhered to no gambling or speculation. Let me explain.
Stock picking is when a fund manager tries to pick out the best stocks from an asset category and stay away from the bad stocks. The Templeton Growth Fund is a world stock fund. With the bulk of the funds money, the fund manager has invested 43 percent of the fund’s assets in U.S. companies, and 52percent in International companies. The fund has a total of 109 companies in its portfolio. If the fund manager was going to eliminate the practice of stock picking and still invest in U.S. companies, he would own the thousands of companies located in the United States, large, small, micro, etc. If he was going to invest in International companies, again,  he would own thousands of companies that make up that asset category. They wouldn’t pick out a paltry 109, and when you pick out only 109 companies from a pool of thousands that is stock picking.
Stock picking in countless academic studies has proven to be a strategy that is detrimental to investors, and yet the financial advisor who was proposing herself as a possible guest on my show was comfortable recommending this to her clients. Again, this was a very nice person. She took the time out of her busy day to speak with me and was very engaging. Why then encourage investors to invest in this kind of actively managed fund? The only thing I could conclude was that she just didn’t fully comprehend the dangers of stock picking or she didn’t really understand how the Templeton Growth Fund was being managed.
In either case, if I had assumed based on her being placed in the Top 100 Wealth Managers For New Jersey or relied on the boards she was sitting on that this was someone who really understood how to put the investor’s agenda ahead of the investment industry’s, then I would have been sorely mistaken. Now a lot of investors are in the same boat. They make the assumption that because their advisor has an impressive title, has fancy professional designations on their business card, etc. that they know what they are talking about, but in actuality they do don’t. Unfortunately, this assumption takes a terrible toll on the hopes and dreams an investor has riding on the outcome of their investments.
So how do you avoid this dilemma? The answer is, you have to know what questions to ask. Knowing the right questions and the appropriate answers to those questions will put you in a position to see if your advisor really knows what they’re talking about or is just a pretender.
Brendan Magee is the president and founder of Inevitable Wealth Coaching. With questions, comments, or suggestions call 610-446-4322 or e-mail Brendan@coachgee.com.


Wednesday, April 6, 2011

Suze Orman's Money ClassDoes More Harm Than Good

Suze Orman’s Book, The Money Class Gets A Failing Grade
                                                By: Brendan Magee
Suze Orman has a new book out entitled “The New American Dream.” It’s subtitled “Learn To Create Your New American Dream.” On a recent television appearance she spoke about how with this book she had written more about investing for retirement  than in any other book she had written. With that I thought I’d see for myself just how helpful it would be for investors.
On page 229 Suze gives her recommendations on how to invest and diversify a $250,000 dollar portfolio. In her opinion you would be properly diverisified if you took $125,000 invested in stocks and allocated it as follows:
85% should be invested in U.S. stock funds. 70% of that should go in large company stocks. 20% should go in medium sized companies and 10% should go in small company stocks, with a remaining 15% going in international stocks. The remaining 15% is to go into International stocks. The standard deviation or the measurement of risk on this portfolio would be 18.17% and the annualized return from 1973 through 2010 was 10.42%
I went back over a thirty seven year period and saw how $125,000 would have grown had I invested as Suze suggests.  My $125,000 would have grown to $5,406,250. Certainly an investor would be happy with that return, until you compared to portfolios with the same amount of risk.
A portfolio that invested fifty percent in U.S. Equities, forty five percent in International Equities , and five percent in cash and had a standard deviation of 19.45% and had an annualized rate of return of 13.16% from 1973 through 2010. That same $125,000 grow to $13,250,000. Suze’s recommendation cost the investor more in lost returns, $8,218,750, than she actually earned the investor.
Suze’s recommendations don’t look any better as we look at what she recommends for the other $125,000 portion of the portfolio. For that money she suggests we invest in cash and T-bills. Again, I used 1973 through 2010 to see how her investor would have done. In my comparison I took half the $125,000 ($62,500) and invested it in cash and the other half in T-bills. Suze’s recommendations generated  an annualized return of 6.05% (Inflation in that time grew 4.42% so my net return was only 1.6%). My $125,000 grew to $1,165,000. Again, let’s compare that to the portfolio above that grew to $13,250,000. Suze’s portfolio cost the investor $12,537,500.
If we were to keep score on the original $250,000, Suze’s portfolio of 50% in equites and 50% in cash/T-bills grew to a total of $6,571,250. In comparison to our portfolio of 50% in U.S. Stocks, 45% in International Stocks and 5% in cash which grew to $27,405,000. Suze’s portfolio cost the investor $20,803,750 in returns. Ouch!!
So why is Suze coming up so small here? The answer is, whenever someone violates any of the rules for successful investing there is a tremendous price to be paid. In this case, the $20,803,750 shortfall is due to Suze’s lack of understanding of diversification. If you read her book, on page 229 her stock recommendations include only four asset categories. There is no money going into value stocks and no money going into micro cap stocks for example.

Also, think about the years 2000-2002 as well as 2008. Those were horrific years for the U.S. economy. When 85% of our stock portfolio is in U.S. stocks there isn’t a whole lot left to offset those big losses. Her portfolio is completely out of balance.
I also mentioned the rules for successful investing in the previous paragraph. One of which is diversification. The two others are own equities and buy low/sell high. These rules are not mentioned at all in Suze’s Money Class. She also fails to grasp that the biggest risk factor in all of their investing is the investor themselves. How or what is she doing to prepare investors for the next bear market or financial crisis? How come she doesn’t let people know that what they do or don’t do or allow to happen to their money will have more of an impact than anything else? I guess it’s a whole lot easier to sell books recommending products rather than personal responsibility.
There is nothing in her latest book to help the investor fully comprehend this variable, nor is there anything in her book that aids the investor in continually following the rules for successful investing. As a result her book is filling investors heads with false and misleading information that as we have seen will take away any hope of attaining the American Dream.
For these reasons and a whole bunch of other reasons, I am going to have to give Suze Orman’s Money Class a failing grade.
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.