Friday, September 13, 2013

Investors Getting Right Answers To The Wrong Questions

Are You Getting Right Answers To The Wrong
Investment Questions?
                                                                             by: Brendan Magee


I think we have all had the frustrating experience of asking someone a question, and sometimes asking the same question multiple times, and getting a response that just doesn't answer the question you'd really like to have answered. A woman I am working with, when she went to discuss some problems she was experiencing with her 401k plan with her benefits manager got answers to questions she hadn't even asked. The answers she got were the right answers to the wrong questions her benefits manager, merely, perceived she was asking.

If Diane had asked the question, what's my fund's returns year to date? 10%  would have answered the question correctly. If she had asked the question, where does the fund I am investing in rank amongst its peers? In the top 15%, would have been the right answer. Unfortunately, those weren't the questions Diane was asking at all and neither the benefits manager or Diane are getting answers to the questions that would reveal the real problems that are prevalent in their company's 401k plan. Frankly, both Diane and her benefits manager are in the same boat, they are both getting the right answers to the wrong questions, so please do not read into this that the villain here is the benefits manager. They are both victims.

In doing an analysis of Diane's 401k plan we saw that 62% of her money is invested in U.S. Large Company Stocks. This was a fund that when she enrolled in the plan, the rep told her, was designed to be allocated for someone in her age range and length of time to go before retirement. Rather than getting answers to the questions, What investments should my money go in, or are these funds any good, Diane and her benefits manager need to be asking other questions. They'd be much better off if they would ask questions like:

-How does the market work? Where do market returns come from?
- How can I get a mathematical measurement of just how diversified I am?
-What's the mathematical measurement of risk for the investments I am considering?
 -What's the long-term expected rate of return of the portfolio I am considering?

In asking those questions, Diane, her benefits manager, and every other investor would be asking the questions that would put them more in control of their investing. They wouldn't put so much stock in rates of return or rankings, things that mean absolutely nothing in terms of making good investment decisions. As it is Diane's benefits manager is giving her assurances in a fund that has way more volatility than she had previously been aware of. Over the course of the past 40 years her current portfolio has, on three occasions, taken a loss of 30%. She is, also,  taking a lot more risk than she has to for the long-term expected rate of return of her portfolio. What good will a five star ranking do her when she experiences a 30% loss? Besides her, who else in the company's plan is walking around completely in the dark about their 401k plan?

This situation isn't exclusive to Diane and her benefits manager. Pick up a magazine, watch an investment commercial on television, or any literature from an investment company. The mutual funds are ranked from best to worst performing. The awards they've been given are proudly displayed and touted as the reasons you should invest your money with them. These are the answers to questions like, what did the fund do over the last one, five, or ten year periods of time or who should I hire to manage my money this year? These are answers that give a sense of credibility to the investment companies which makes it easier to sell their funds.  They don't make it any easier to be a successful investor or gain confidence, clarity or peace of mind. These are the wrong questions to be asking and there is a terrible cost to be paid for making decisions after having asked the wrong questions.


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.

Monday, September 9, 2013

Investors Can't Fix Inside Problems With Outside Solutions


Solving Inside Investor Problems With
 Outside Solutions Just Doesn't Work
                                                                            By: Brendan Magee

People Magazine's July 2013 issue highlighted the struggle and triumph Matthew Perry (Chandler Bing on the hit sitcom, Friends) experienced in overcoming his 10 year addiction to drugs and alcohol. He spoke about the catharsis he had, that moment when he finally got on the road to recovery, and finally got what friends and professionals had been telling him for years. His story is one that investors can learn a lot from.

Like a lot of investors wanting to invest their way, Mathew Perry wanted to handle his recovery "his way." When life was getting out of control, Perry made changes, and with being paid $1 million per episode he could afford extravagant changes to his life. He bought houses and moved a lot. In his words, "If I just lived over there, I'd be fine." When investors aren't seeing the results they want, they often make changes to their portfolios. The Dalbar Study for 2012 showed that on average investors make a change to their portfolio within a three year period of time. As Perry puts it, "It was/is a classic case of trying to fix inside stuff (problems) with outside stuff."

Recovery for Perry didn't start until he had an inside revelation, and for most investors becoming a successful investor won't happen until they have a similar catharsis between their ears as well. His recovery coach, Earl Hightower a leading interventionist and addiction specialist, had been working with Perry for years preaching the same message with little results to show for it. Perry, one day saw it clear as day, the changes he wanted to achieve in his life weren't going to occur until he stopped trying to do things his way. From that point on, Perry said, " I was willing to do whatever Earl Asked me to do for the rest of my life."

By itself, here is an invaluable lesson to know if you have a coach you can have a life long relationship with or you are merely doing business with an advisor looking to sell you products. Does their message change or is it still basically the same. Over 500 times Hightower's message to Perry was the same. An investor coach's message will also stay consistent. "Own equities, diversify, buy low sell high and at no time engage in stock picking, market timing, or track record investing." Any deviation from this and you do not have a coach. You have someone who is going tell you what you want to hear to keep you as a customer, not make sure you hear what you need to hear in order to be a successful investor.

For Perry, being a huge television star, there was no shortage of opportunities to drink and do drugs and his life quickly spun out of control. For investors, there is no shortage of investment products that can quickly turn an unsuspecting, trying to the right thing, investor into a gambler and speculator. There are 27,000 mutual funds to choose from, there are internet trading web sites to log onto, as well as over 600,000 stock brokers trying to lure you to their services. Like drugs and alcohol they are not readily labeled as things that can ruin our life. Stock picking, market timing, and track record investing perpetuate the illusion that these are things that will enhance your life.  Drugs and alcohol abuse are two activities that will eventually, inevitably destroy a person. An investor who engages in or can't tell the difference between prudent investing and gambling and speculation will eventually see their financial security destroyed. 

As it was for Perry, the days of going to work painfully hung over and seeing personal relationships destroyed are problems in and of themselves, but in reality they were merely the symptoms of a much bigger internal problem. As Perry found out if he didn't deal with the internal problem of addiction, the symptoms were going to get more severe and damaging. Investors need to take a similar actions.
They need to be able to identify and deal with the bigger problems not just symptoms.

Along with gambling and speculation, if you haven't defined your investment philosophy, if you haven't identified your true purpose for money, and you don't know exactly what you are doing when it comes to building your portfolio, yours is more of an internal problem than an external problem. Trying to find solutions by, solely, making changes to your portfolio, any success you experience will be temporary and the problems that led you to make those changes, disappointing returns, massive losses, no accounting for costs, confusion, anxiety, and worry will come back stronger and be that much more severe.

In dealing with the internal problem of addiction, Perry says he is in a  "good place" and really feeling "comfortable." When, as an investor, you focus your attention on yourself as an investor, and ask the questions you really need to start asking and getting the answers to, that's when you will begin to experience true peace of mind."

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.

Thursday, September 5, 2013

The Rules Don't Apply To Stock Analysts

Does Your Broker's Recommendation Coming 
With No Accountability?
                                                                          by: Brendan Magee

I am in the midst of reading a very informative book, "Brokerage Fraud, What Wall Street Doesn't Want You To Know," written by Tracey Pride Stoneman and Douglas J. Schulz, and I like to share an interesting tidbit I picked up in my reading.

I think all investors realize to one extent or another that the investment industry's objectives and the investing public's agenda are in conflict with one another. The investor wants the truth on what is the best way to invest their money, keep costs down, take as little risk as possible, and get a decent rate of return. The brokerage industry wants to be profitable. They want you to buy the stocks, bonds, mutual funds, and investment products they sell. To accomplish this, they need to get your attention and make their products look irresistible. However, investors want to be advised, not sold. They want the inside scoop on what is going to do well and what is going to tank.

The brokerage industry's response is to offer investment analysis. They hire analysts to track stocks, different markets, and spot trends that will give their investors the edge. In Brokerage Fraud, Schulz recalls in his days working for Merrill Lynch that on every Monday morning there would be a conference call played throughout the office's p.a. system, where Merrill's analysts would list the stocks, companies, markets, and market sectors they were recommending the brokers to sell and investors to buy. That particular week, these were the recommendations the brokers were going to make to their investors. The analysis gave the broker's recommendation a layer of credibility that would make it easier to sell to their investors.

Stoneman Pride and Schulz write, "One little known fact that isn't made readily available to most investors is that, generally, research analysts that work for the brokerage houses do not have any accountability. Where a stockbroker must have a "reasonable basis" for recommending a stock or investment to a customer, no rules or regulations dictate what an analyst says or what must be in a research report. No securities rule or regulation applies to the analyst because they do not hold a securities license. They operate with relative impunity."

So if the brokerage house has been hired and paid hundreds of thousands of dollars to sell the stock of a publicly traded company, what do you think they are going to want their analysts to say about that particular company? Is the brokerage firm going to continue to have a profitable relationship with the company if the analysts use language like "buy, attractive, hold long-term or sell, dump, get out?"
This puts the analyst and the brokerage house in the position where the truth might serve the investor's best interests, but not the brokerage house's profitability.

Perhaps,  if investors understood their broker's recommendations were coming from someone who is perhaps more beholden to the firm then the investor and that no rules or regulations apply to analyst's recommendations, they might not put as much faith in their broker's advice.

So as Stoneman Pride and Schulz say, "Buyer Beware!"

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