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Investors Have Been Duped
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Added: 11/01/2004
Type: Summary
Viewed: 517 time(s)
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Investors Have Been Duped
November 1, 2004 -- The financial services industry has duped unsuspecting investors out of millions of dollars. For decades, they’ve said the best way to invest was to buy an investment and hold it year after year. I think they’re crazy!
The key to greater stock market returns is a little-known secret shared by some of the most successful stock market traders. It is simply this: better returns begin by minimizing losses.
That’s right. It’s not some undiscovered method for finding that special stock that will go up 1,000%. It’s not digging through the near-microscopic footnotes on a company’s balance sheet. It isn’t reading technical charts in an attempt to anticipate the future. All of these methods can be used to help select which investment to buy. The key is what you do after you buy it.
Brokerage firms and their army of advisors have been preaching the wonderful benefits of Buy and Hold for decades. It’s been taught in colleges and the courses advisors are required to take in order to earn advanced designations.
Buy and Hold has been supported by legions of mutual fund and insurance company representatives. These ‘wholesalers’ sell your broker or advisor on recommending their products instead of their competitor’s. They produce beautiful brochures that show an investor will suffer irreparable harm if the 5 best days each year are missed–but more on that later.
The muscle of the Buy and Hold philosophy was strengthened when a Nobel Prize was awarded to Harry Markowitz in 1952. Markowitz is the founder of Modern Portfolio Theory. In a nutshell, Markowitz found that by dividing a portfolio across several investment categories that risk can be reduced without sacrificing return. This theory is based on each investment category earning its historical return.
The historical return on equities over the last 30 years has been roughly 10%. It’s historical percentages that are used by most financial planning software to help project how much you need to save in order to retire or how to divide your portfolio so your money lasts longer than you.
If these assumptions are wrong you will have to work longer before you can retire. You will have to live with less during your retirement. Millions of retirees have been forced to go back to work in the last few years because they believed these assumptions.
These assumptions are based on the belief that low short-term market returns will ‘revert to their historical mean’ over time. In other words, just because the market didn’t earn 10% this year or the year before that or the year before that (!), just ‘hang in there’ because eventually you will earn the historical average.
This means that you must sit there and do nothing while your investments lose 20-50% or more of their value. That’s why your advisor does nothing while you watch the value of your portfolio fall off a cliff! “Just hang in there, it will come back.” It may, but how long will it take?
Earlier I mentioned the charts provided by wholesalers. How come the advisors using charts that show decimated returns because the 5 best days were missed each year never show a chart of what would happen if the opposite occurred? What if the 5 worst days each year were missed?
The first reason they don’t show you just such a chart is because they don’t know what would happen themselves. They’ve never looked into it. They just toe the party line. It’s in the financial services industry’s best interest that you believe Buy and Hold.
A study done by Birinyi & Associates measured staying fully invested from 1966 to 2001 versus if missing the 5 worst days each year. The Buy and Hold return period was 1,071% meaning $10,000 grew to $107,100.
On the other hand, the return if you were able to miss just the 5 worst days each year was a whopping 98,612%. Ten thousand dollars would have grown to $9,861,200!
No one can predict when the five worst days of the market will be each year. Nor can they predict when the five best days will occur. It’s common sense, though, that the more money you lose the longer it will take to earn that money back. Why not just prevent big losses in the first place?
Not all advisors preach Buy and Hold. Some realize the secret to greater stock market returns starts with a fanatical focus on minimizing your losses. I’m one of them. I’ve invented a money management system designed to produce dramatically higher returns while significantly lowering the potential for loss. It does so by making sure small losses don’t turn into devastating ones.
In turns out you were right--it doesn’t make sense to sit there and do nothing while your investments drop like a rock. If your advisor preaches the benefits of ‘investing for the long-term’ or tells you to ‘just hang in there’ give me a call. Your lifestyle and retirement could be at stake.
Mr. Voudrie is a Certified Financial Planner, nationally syndicated columnist and President of Legacy Planning Group, Inc., in Johnson City, TN. For more information call 1-877-827-1463 or email e-mail protected from spam bots.
Looking for an energetic expert who is passionate about financial and wealth management? Mr. Voudrie is an excellent speaker who will excite and inspire your audience. Mr. Voudrie is available for a limited number of speaking engagements, television appearances and radio talk shows. For booking information, contact Christine Lavender at (877) 827-1463 or email e-mail protected from spam bots.
Related Articles can be found at www.guardingyourwealth.com under the Guarding Your Wealth Article Archive:
Seniors Beware Buy and Hold
Buy and Hold Hammers Retirees |
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