The Mutual Fund Show Misleading Investors
Sept. 12th, 2012
Adam Bold, has a radio show, the Mutual Fund Show, that broadcasts in 60 cities across the country. More than likely you have heard the show or listened to one of his promos. Callers call in and ask his opinion about whether or not they are in the right mutual fund.
I was listening the other day when a caller inquired about a fund that he said had perfromed decently over the past three or four years, but lately has been producing disappointing returns. He wanted to know if he should sell it and investin a new one. Mr. Bold looked up the fund and found out that the majority of the fund's assets were invested in China which he liked because in his opinion there was no doubt that China was going to be a world wide economic giant in the coming years. He went on to suggest a couple other funds he liked and that had had better recent performance numbers.
As the phone call ended I wondered if Bold truly understod what business he was really in. In his show's bio, Bold states that his job is developing recommendations for people's investments. However, when a person is making statements about the future economic condition of a country on the other side of the globe, they are not in the investment business, they are in the predictions business. In other words they are in the gambling business. Investing and gambling are not the same thing, and when you confuse the two, you have a recipe for disaster, especially when you are dealing with people's life savings.
When I first started in the business, the rising economic giant was Japan. From 1965 through 1987 their GDP went from $91 billion to $1 trillion. Japan was in the midst of buying prime real estate all over the United States. They bought Pebble Beach, Rockefeller Center as well as a lot of banks. The fear was that the United States was going to become an economic colony of Japan. Then out of no where in 1989, Japan endured a major financial and real estate melt down.
The Japanese Government attempted a stimulus package (sound familiar!) in an attempt to revive their failing economy which didn't have the effect they had hoped for.As of October 2010, their national debt reached $1.5 trillion and their debt stood at 192% of their GDP. None of which, as Japan was gaining in economic power, could be predicted with any reliability.
So here we are again. China has certainly been getting a lot of notoriety for its economic transformation, and somebody stands up and says, abosolutely they will become an economic giant. If Bold really saw triple digit profits coming from the Chinese economy, the caller would have been wise to ask how much of Mr. Bold's money he had invested in China. The real truth is, neither Bold nor anyone else knows beyond a shadow of a doubt what is going to happen to China's economy over the next six months, years or 60 years for that matter.
If Bold really understood how capital markets really worked he would have told the caller that the possibility of China becoming a world economic power has already been factored into market prices.
On the flip side, the market has also factored in the possibility of China's economic collapse. Beyond that his opinion is only a guess, which Bold didn't care to share with the caller. Nor did he seem to let the caller know that if he sold his fund at its current level and invested in the funds he was suggesting that he'd being creating a loss for himself by selling low and buying high.
Here's the bottom line. It's fun to make predictions. Right now in Philadelphia we're having a lot of fun on two fronts: the Phillies making the playoffs and whether or not Mike Vick lasts the year as the Eagles quarterback. It's great to debate such trivial things. However, no sane person in Philadelphia would, for one second, wager their 401k plans on whether or not their prediction turns out to be right.
As far as investing is concerned, ignore the predictions. No matter how well informed they sound, there is nothing to them. Follow the rules of investing: Own a cross section of equities, diversify amongst a variety of investment categories (cash, bonds, stocks), then rebalance. If you do those things you will have a lot more time to enjoy debating sports, hanging with family and friends, or listening to your friends complain about the the investment tip they took advantage of that went south.
Brendan Magee is the founder of Inevitable Wealth Coaching. With questions, comments, or suggestions, call 610-446-4322 or e-mail firstname.lastname@example.org