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.