What Difference Will Your Broker's Watching The Market Make?

What Difference Will Your Broker’s Watching
The Market Make?

                                                      By: Brendan Magee

                                                                                                     10/27/2011

I had an interesting conversation with a very nice woman recently. Anne is in her late forties and has a very successful business consulting firm. She’s endured a divorce, raised and educated three children, and pulled herself up by her own boot straps. She’s got a lot to be proud of.

We had a conversation about a recent investment decisions she made. She told me that she moved her investments from one broker to another. She told me she her old broker wasn’t paying her enough attention and that coupled with disappointing returns more than justified the move.

I asked her, what was it about the new broker that appealed to her? Anne said that the new broker promised to be in communication with her on a more frequent basis with phone calls, e-mails, etc. The other thing the broker said that appealed to Anne was that she would keep closer tabs on her investments as well as the stock market. She said that if the market or her accounts moved in a certain fashion, she would be in touch and talk to her about where they should move her money or what new strategies they should make use of. With that, Anne felt better.

My questions and questions that Anne didn’t have an answer for was this, what, exactly, was the new broker going to be looking for? What is it that certain market or account movements actually would be telling the broker? What good does it do your investments to base decisions on what the market did yesterday, last month, or two years ago when tomorrow and all the tomorrows that will follow that will have the most impact on Anne’s investments?

Burton Malkiel, Professor of Economics at Princeton University, in the documentary movie, Navigating The Fog Of Investing, said something along the lines of,  the market has no idea nor does it make decisions based on what it did yesterday or the day before that or the day before that. It’s tomorrow’s unknowable information and events that will move the market.   

Written into the Prudent Investor Law is the notation, “Bargain shopping in an attempt to the winners from the losers through forecasting is deemed wasteful.”

Unfortunately for Anne not knowing to ask the questions above and not being aware that there isn’t any  value to be derived from her broker’s promises leaves her with a false sense of security and a lack of awareness that her broker’s strategies are not going to help her become a more prudent investor. She is completely unaware to the fact that her broker is going to turn her into a gambler and speculator exposed to all the risks  of gambling and speculation.  

She would have been much better served if she was told that nobody knows where the market’s or  investment’s next twenty percent movement was going to go. Anne would have been better off knowing that she didn’t even have to know to become a successful investor. She would have been better off knowing the three simple rules for becoming a successful investor (own equities, diversify, buy low/sell high) and knowing that she had a process in place to follow them at all times.

She would have been better served to have asked and had a coach help her understand how capital markets actually work and where returns are coming from. She would have been better off with being able to mathematically measure risk and know point blank how to control it.

Anne would ultimately have been best served if she knew that brokers and financial planners have neither the time nor inclination to do anything but sell products and earn commissions, and that watching the markets and her accounts is the justification to sell her tomorrow’s product and earn tomorrow’s commissions.

Brendan Magee is the founder and president of Inevitable Wealth Coaching. With questions, comments, or suggestions call 610-446-4322 or e-mail Brendan@coachgee.com.

  

IndyCar Racer Dan Wheldon's Tragedy And Investing

Auto Racing And Investing:

 The Tragedies Are Not Coincidences

                                                                                By: Brendan Magee

                                                                10/19/11

I have to admit right off the bat that I know hardly anything about auto racing, except that it is a very dangerous sport. Evidence to that is the tragic death of IndyCar Racer Dan Wheldon last Sunday at the Las Vegas Motor Speedway. Unfortunately, his is not the first, and in all likelihood it won’t be the last. How much sadder could it get than a 33 year old father leaving behind a wife and child?

As I was thinking about the tragedy, my focus turned to auto racing and the risks drivers take every time they engage in a race. They are in a very confined space with a lot of other cars travelling at around 200 miles per hour. Under those circumstances, it is not a coincidence that someone will eventually be hurt and even die. Under those circumstances there’s an inevitability that at some point very bad things are going to happen.

As I thought about it, I started to think about the long-term returns the majority of investors earn. The Dalbar Group has studied the results that the average stock mutual fund investor has generated. From 1989 through 2008, when U.S. Large Company Stocks did an annualized 8.34%, the average stock mutual fund investor earned just 1.87% per year. The average investor didn’t even keep pace with inflation which rose at 2.89% per year in that time frame.

So how is it that investors are doing so poorly? Is it just a coincidence or is there an inevitability to the actions they are taking. One thing the Dalbar Study showed was that the average investor kept their portfolios intact for just three years. Within a three year period of time some changes were being made. Even though everyone has been told that stocks are a long-term investment, investors can’t seem to give their portfolios the time they need to capture market rates of return. What is it that investors are doing with the changes? The study showed that they are selling out of underperforming investments and buying investments that had better performance. Hence, they are buying high after having sold low. You do that enough and your returns are going to suffer.

Another thing that is taking place is that the activities of gambling have been confused with prudent investing. The expected rate of return on gambling is zero. Engage in gambling enough and your returns will be less than zero. That is because in the world of investing the more trading (gambling) that an investor does there are more and more charges assessed, charges that come right out of your investable assets. Now, you may not be actively participating in the trading. Your mutual fund manager might be doing it in the fund you’ve invested in. The average mutual fund trades 100% of their fund’s stocks over the course of a year. That’s a portfolios worth of commissions and all the other costs that go along with it, as well as all of those opportunities to be wrong  about the future.  If an investor engages in activities that require consistently predicting the future and returns are going to suffer.

The real mystery here is why are investors so shocked and upset when their investments haven’t performed at a sufficient level. If you stuck your hand on a lit candle there’s no mystery as to why your hand hurts. Do enough of the wrong things in investing and returns are going to be disappointing.

Brendan Magee is the founder and president of Inevitable Wealth Coaching in Drexel Hill, Pa. With questions or comments call 610-446-4322 0r send an e-mail to Brendan@coachgee.com.

Quarterbacks & Investors Can Only Take So Much Punishment

                                                                                                                                By: Brendan Magee, 10/4/100

During an average National Football League game statistics show that each team will run about 60 to 70 plays. Combined there are 130 to 140 plays that will involve a collision between eleven two to three hundred pound fast moving professional athletes. Each week players get hurt. Some are out for a week or two, others experience career ending injuries.  There really isn’t any mystery as to why so many players get hurt. There is only so much abuse the human body can take.

Investors are exposed to an emotional and psychological pounding that can be just as debilitating . I was reminded of this by Tom and Terry. We met and spoke about the pressure they were under with so much debt. They spoke about how they were feeling uneasy about having seen their savings account balances so low. They were disappointed by low returns on their retirement accounts. Worst of all they had made honest efforts to fix their problems over the last seven years, but their problems were growing worse.

Their efforts included working with a financial planner, but after selling them some insurance they hadn’t seen too much of him over the years. When they got to meet with him his advice seemed to miss the mark. They had money automatically deposited into their savings accounts, but that didn’t provide the solution. They cut back on living expenses. They went to seminars and enrolled into programs designed to improve their financial lives, but that wasn’t the answer. They spoke to business colleagues who were more affluent then them and tried to solicit their advice, but again the ship was continuing  to sink.

Just imagine if you will, when you were a student.  For every test, you studied like crazy to get good grades, but every time you got a “D” or worse an “F”. No matter how hard you tried, no matter how sure you were that this time you knew the answers to the test, you had to come home and show your parents the poor results you were getting. What a blow that would be to your pride and your and ego? How deflating would that be? Over time you could easily be in the position of asking yourself, “What’s use, I’m only going to fail anyway?”

You could easily be resigned to your fate. No College degree, no good job, no nice car, family, security, etc.

This type of resignation is what Terry and Tom were dealing with. “Mutual funds weren’t the solution.” Friends seemed to doing ok, but not us. The people who were supposed to have the answers didn’t have any. Money spent to gain the knowledge ourselves only led to more confusion and anxiety. Where should money be invested?  From where they sat, it would be better to keep the problems they had rather than experience the pain of their hopes and expectations being dashed once again.

Now unlike a football player who lines up seeing that there are 11 other players across the line of scrimmage ready to pound the living daylights out of them, the financial planning industry doesn’t  give the investor the opportunity to see where the hits are going to be coming from. Behind a maze of information and promise of a brighter financial future is the reality that the investment’s industry’s profits depend on investors being confused, disappointed, stressed out. Ironically, the catalyst for all this is the financial planning industry itself.

For example, Tom and Terry had the expectation that their financial planner was going to have advice on how to handle their finances. That assumption set them up for the first hit. The financial planner was a salesman. Perhaps he sold them a good life insurance policy, but there wasn’t going to be any real guidance or counseling beyond that. Also ask yourself, “Where the does the notion to put your trust and faith in that insurance company and all their products come?”

Their friends and business colleagues offering investment advice were basing their advice on the same failed foundation as broker and planners. They made the mistake of thinking gambling and speculation was solid investment advice, and could be relied upon. They would look at the track records of mutual funds, the price of gold, the big headlines from the cable news and investment shows and try and figure out what was going to happen in the future. Not realizing that no one can tell the future set them up for another blow. Now ask yourself, “Is there an investment ad out there that doesn’t have a stellar track record?” Couldn’t you fill the Grand Canyon with all those ads?

Then you add the stress, confusion, and fatigue of trying to figure out which of the do it yourself programs to invest in is the right one, only to find out that none of them work. After a while, Tom and Terry have this sinking feeling that the solution to our problems isn’t on our radar screen. Add all this to raising kids, running a house, doing a good job at work. Eventually, something is bound to give, and what gives, as Tom and Terry said, is the energy and will to get up of the canvas and try to tackle their financial problems one more time.

So how do you avoid being so beat up by the financial planning process? The answer is in three parts:

One, understand that financial planning’s agenda and yours are in conflict with one another. You want peace of mind. They want to sell you a product.

Two, know that if you follow the advice of the financial planning industry you are not going to be prudently investing it. You will be gambling and speculating and the results are consistent with buying lottery tickets. Your hopes and dreams may be running high, but don’t have expectations of cashing in.

Three, Understand it’s not about getting the right information. Investment success depends on asking the right questions. The right questions will reveal the truth about how markets really work, and misconceptions about investing that you may be walking around with.

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.