Poor Investment advice

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MarketWatch had some interesting thoughts in “The high price of poor investment advice.” Let’s listen in:

Investment advisers, some of whom are inexperienced yet sincere representatives of the largest financial services firms, repeat stories they have memorized about where the best investments may be and how to find them.

Whatever happened to some of these great storied opportunities and pearls of investment wisdom? How are they holding up in today’s market?

Let’s take a look:

1. “China and Asia are the best long-term investments and will drive the future of investing.”

While it is hard to read the tea leaves in volatile markets, it does appear that China is recovering and building for the next business growth cycle. Meanwhile, raw-materials suppliers, especially Brazil, are helping China achieve its potential.

Maybe they will recover and lead; but that does not make them a good investment at this time while the world is stuck in the middle of a bear market. Company layoffs and sharply declining exports are just beginning and any engagement in bottom fishing hoping for a quick recovery can have negative consequences for your portfolio.

2. “Economic growth in Asia is independent of the U.S. market.”

True over the long-term, but Asian stocks now move in synch with U.S. stocks. The customer must grow to be able to buy in quantity from the producer.

Asia has 10 times the population of the U.S. and three times the economic growth rate of the U.S. While Asia may be a great long-term investment now at “fire-sale” prices, it could be years before the region heats up again.

The myth of Asia and other parts of the world being decoupled from the U.S. came down crashing hard and fast. I agree that any recovery will take years because most of the Asian economies were built on export and selling product to the ever hungry American consumer. This consumer has gone into hibernation for years to come.

3. “I get my advice from (fill in your favorite major bank or stockbroker) and they will take care of me.”

It’s wishful thinking to get advice from inexperienced sales representatives of firms that went bankrupt for creating troubled assets (which are no longer worth even a fraction of their original value) and “eating their own poison” by foolishly keeping them in their portfolios.

The average no-load stock fund manager has just over four years of on-the-job experience (that doesn’t even stretch back to the 2000-2002 bear market). Even the five-star rated funds averaged a loss of 29.1% in 2008; at least those managers average six-and-a-half years of experience.

A stockbroker taking care of you? Oh yes, that turned out to be the biggest lie of 2008. As I have written many times before, brokers and others engaged in selling products based on commission are in the business of generating income for the firm and are not concerned too much about your financial well being.

They only know how to get you into an investment and continue to prove that buy-and-hold is the ultimate losing proposition. Here’s the best advice I could ever give you: Never ever do business with an advisor/broker that does not have an exit strategy. That will eliminate over 95% of them.

4. “International funds add to your diversification.”

If your advisers don’t want to work enough to change your domestic asset allocation, why expect them to understand international investing?

In the past five years some countries’ stock market indexes grew at five times the rate of the U.S. stock market (until U.S. stocks fell off the cliff), and while the U.S. dollar was declining, international investing was safer.

Sure, in a bull market, it’s a great idea to diversify into some international funds. However, in a bear market, they go down faster than then domestic market. This was proven via our international Trend Tracking Index (TTI), which signaled a sell on 11/13/07; way before the domestic TTI did on 6/23/08.


5. “What is your risk tolerance? Let’s talk about an asset allocation especially for you.”

There is little academic research on risk tolerance. Risk tolerance is a sales pitch based on your ignorance of investment risks. It is all about having you tell the adviser about what you are afraid of and what you can be convinced will address your concerns — not the odds of investment success.

In recent years, avoiding risk has been more successful than taking it. Your advisers had no idea because they wanted to sell you something (gather your assets under management) instead of growing your assets. As a result, over the past decade you often invested in growth funds that didn’t grow and value funds that added no value.

If you follow mindless asset allocation, you bet it’s important to work with an investor’s risk tolerance. If you follow trends, and you use sell stops at all times, that issue becomes less important.

6. “I only invest in five-star Morningstar stock funds.”

The 274 five-star Morningstar rated, no-load stock funds lost 29.1% on average last year. Why? They wouldn’t go to cash to protect you from investment losses and many took excessive risk to earn star ratings.

Using Morningstar rankings along with buy-and-hold is the biggest losing strategy an investor can engage in when we are crossing into bear territory. The sad story is that neither Morningstar nor the investing public learned that fact from the 2001 bear market, which is why they participated in a repeat losing performance in 2008.

7. “The stock market will come back.”

Frankly, if your stock funds’ value doesn’t disappear, it doesn’t have to come back. Since the end of 1999, most fund companies have lost you so much money that you may never see your investments intact in your lifetime.

Sure, the market will come back. The question is will you be around to experience it? Losing 40% to 50% of a portfolio’s value, as happened to many in 2008, will alter your future forever. Hopefully, you won’t be one of those who can finally retire about 6 years after you have died.

8. “Long-term goals can only be reached by investing in the stock market. The money market won’t get you there.”

To build up wealth over the long-term you need to have the discipline of avoiding losses in down markets and investing in the hottest sectors in rising markets.

True. Being in money market will not make you rich. However, it’s an appropriate investment vehicle to be in when the markets are in turmoil. It sure makes more sense to be safely on the sidelines than watching your portfolio slide into abyss. The famous gambling line “Know when to hold ‘em—know when to fold ‘em” makes a lot of sense in this environment.

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