Who should retirement investors trust?
Reprinted courtesy of MarketWatch.com
Published: Feb. 19, 2014
To read the original article click here
One of the most important decisions any investor makes is where to place his or her trust. This topic was the focus of a whole chapter in my 2011 book, Financial Fitness Forever.
I narrowed the choices to Wall Street (brokers, the industry, the financial media), Main Street (your friends, neighbors, relatives and colleagues who are always happy to share their investment success stories, real or imagined), and University Street (academic researchers who spend their lives figuring out how investing really works).
You can probably guess which of those three earns my own trust.
Here’s another approach to this all-important topic, based on an article I wrote in 2006. Why is this so important? When I am operating in an environment that I trust, three things happen. My anxiety level drops. Everything works better in my life. Most important, I find it easier to stick to my plans.
Too many investors bypass the step of finding trust. They move from adviser to adviser, from stock to stock, from fund to fund. Often, without realizing what they are doing, they make major changes in their asset allocation based on flimsy information and emotional reactions.
Even though this behavior is counterproductive to long-term investment results, the financial media and Wall Street encourage it, for their own reasons.
A manager who wants your business must persuade you to do three things: first, ditch your current adviser; second, put your trust in a new manager; third keep that trust in the new manager. Meanwhile, the next adviser comes along hoping to undermine that newly found trust.
If you study financial ads, you will see that most of them are involved in this cycle. Untold millions of advertising dollars are spent every year trying to persuade us to switch.
The media is a willing player in this. The financial media’s job isn’t to look after the best interests of viewers, listeners and readers. It is to keep those investors constantly on edge so they will keep coming back for more.
How do they do that? By providing their audiences with a steady stream of what’s new, what’s better, what’s different. If you don’t believe me, think about this: Which magazine will fly off the shelves at an airport newsstand, one with a cover story on 10 stocks you should buy right now or one promoting an article about enduring investment lessons from the 1980s?
And ask yourself this: When was the last time you saw a magazine saying the “killer strategy” promoted in its pages a few months ago (one which many readers presumably followed with their own money) turned out to be a dud?
Instead, you’re likely to see a publication filled with “feel-good” articles and advertising selling eternal hope.
So far, I have presented a pretty negative lens through which to look at the financial industry. Now let me give you a different view. For decades I was in the money management business myself. Like my competitors, I tried to present my views and my results in the best light, because I believed in them and their value to my clients and to other investors.
At the same time I knew, every day, that my livelihood and my business depended on the trust of clients. I knew that only if I had my clients’ trust could I do my best work for them.
Everything I did and everything I said was aimed at earning, gaining and keeping that trust. I knew that once I lost a client’s trust, for whatever reason, the client must move on. Otherwise the client’s stress would rise and so will mine. When the trust is gone, so is the client.
Many investors, in an effort to understand investing, spend too much time glued to financial TV shows of dubious value. Many read or at least browse through The Wall Street Journal, Investor’s Daily, financial books, magazines and newsletters.
Many people place their trust in publications like Forbes and Money magazine, believing that these publications have done their homework for them. Alas, that trust may be misplaced.
Too many people don’t have a clue that many of the articles they rely upon were spawned in the public relations departments of mutual fund companies, brokerage houses or other investment product firms.
Unfortunately, I have learned that many well-meaning financial writers don’t know enough about the fine points of investing to spot many of the potential dangers of investment decisions about which they write.
Whatever your portfolio is, there is only one person in the world likely to agree with it completely: Whoever designed it. I challenge you to find any stockbroker or money manager who would look at your portfolio and conclude it’s perfect for you and urge you to make no changes.
Unfortunately, this essay doesn’t have a nice, neat bottom line that will resolve the issue. I have spent some time thinking about what I trust, and I’ll share some of my thoughts with you in the hope that it stimulates your own thinking.
- I trust that my results will be better if I carefully make a long-term plan and then stick to it until my circumstances change. I trust that this will serve me better than if I try to follow investment fads;
- I trust that my results will be better if I’m dedicated to minimizing my expenses, both of the one-time variety (such as sales commissions) and of the ongoing variety (such as annual expense ratios;
- I trust that I will end up with more usable money in my lifetime with tax-deferred (or tax-free) investments than with taxable ones;
- I trust that in the long run, stocks will make me more money than bonds, even though my portfolio contains some bonds to reduce volatility;
- I trust that professional salesmen, such as stockbrokers, aren’t likely to place my interests above theirs, and that I will be better off to avoid such advisers, no matter how much I may like them personally;
- I trust that well-chosen no-load mutual funds will do better in the long run than equally well-chosen load funds. I trust this even knowing that there are some very good load funds;
- I trust diversification over concentration. No matter how good I may be at picking an asset class or a no-load mutual fund, I believe my results will be better if I diversify;
- I trust I will experience less risk if I own international stocks as well as U.S. stocks, small-cap stocks as well as large-cap stocks, value stocks as well as growth stocks;
- I trust I will have less anxiety — and take less risk — if I include a hefty proportion of bond funds in my portfolio;
- I trust that academic research is the best guide to making the best decisions. I trust this much more than my own emotions. Though I wish it were otherwise, how I feel and what I want makes absolutely no difference to the market;
- I trust that my investment results will be better, my anxiety and my tax bills will be lower and my time will be freer if I use the services of an adviser who understands my needs and trusts the same things I do.
If there’s a bottom line to all this, I think it’s that compiling this personal list has been valuable to me.
I recommend that every serious investor go through the same process. I hope you’ll trust me on that point.
Richard Buck contributed to this article.
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