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June-27-17

A Test For Your Broker

Brokers are a friendly lot. They’re also supremely confident of their ability to manage your money. They’re rarely challenged, which is too bad.

Many brokers tout their ability to “beat the market”, by market timing, stock picking or selecting the next “hot mutual fund manager.

Sound familiar? If this describes your broker, here’s a test to see if these claims hold water.

Beat the S&P 500 Index

The test is simple. Tell your broker you’re interested in tracking or, optimally, beating the returns of a low management fee, S&P 500 index fund. Use Vanguard’s 500 Index Fund (Admiral Shares)(VFIAX) as an example.

The question is simple: Would you be better off buying this index fund or relying on the broker’s purported ability to select stocks from this index which are likely to outperform?

Most (but not all) brokers will tell you they’re confident in their ability to pick outperforming stocks.

Ask about their methodology

Don’t just accept the word of your broker that he (or she) has this skill. Show him data that 88.30% of large-cap funds (which are the funds that use the S&P 500 index as a benchmark) underperformed the index for the five year period ending December 31, 2016. What does he know that these sophisticated mutual fund managers missed?

Don’t expect him to be deterred. He’s likely to tell you that this data proves his point. It shows 11.7% of mutual funds outperformed. The trick, he will tell you, is picking the winners from the losers and that’s “why you hire me.”

Keep pressing

Don’t let his bravado intimidate you. Ask how he selects the “winners.” If there were a foolproof way to do this, why would anyone buy the “losers”?

He’s likely to tell you he spends a lot of time analyzing the performance of fund managers who have a track record of outperformance. He relies on past performance to predict future performance.

On the surface, this makes sense. When you probe deeper, it’s the formula for investing hell.

Lack of persistence

The Persistence Scorecard, compiled by S&P Dow Jones Indices demonstrates that relying on past performance is a fool’s errand. According to the most recent analysis, “It is worth noting that no large-cap, mid-cap or small-cap funds managed to remain in the top quartile at the end of the five-year measurement period.” The study concluded, in language that could charitably be described as an epic understatement, “This figure paints a negative picture regarding long-term persistence in mutual fund returns.”

A “negative picture”? It obliterates the notion that relying on past returns of a mutual fund is any more reliable than sorcery!

Grade the test

Your broker will be unable to justify his confidence that he can beat a low management fee index fund. If he persists, ask him to show you a peer-reviewed article justifying his methodology. He will be unable to do so.

Give him a failing grade.

Then run for the door.

A Test For Your Broker blog was originally posted on The Huffington Post website.

 

2014-04-01-Hiresfrontbookcover.jpgDan Solin is a New York Times bestselling author of the Smartest series of books, including The Smartest Investment Book You’ll Ever Read, The Smartest Retirement Book You’ll Ever Read, The Smartest 401(k) Book You’ll Ever Read and his latest, The Smartest Sales Book You’ll Ever Read. He is a wealth advisor with Buckingham and Director of Investor Advocacy for The BAM ALLIANCE.

The views of the author are his alone and may not represent the views of his affiliated firms. Any data, information and content on this blog is for information purposes only and should not be construed as an offer of advisory services.

 

 

By: Dan Solin | 0 comments
June-13-17

The Two Most Dangerous Words For Investors

I won’t keep you in suspense. The two most dangerous words for investors are “legendary investor.” This description is bandied about by the media to describe an assortment of stock market “gurus”, billionaires and wannabes who’ve made a fortune by managing other people’s money.

The premise is alluring: They’re rich so they know something the rest of us should heed.

The reality is quite different.

Mr. Rogers’ Neighborhood

It’s difficult to argue with the success of Jim Rogers. He’s an American businessman and investor. He made a fortune as co-founder of the Quantum Group of Funds, which he started with famed investor George Soros. He’s a frequent guest on financial media where he dispenses predictions about the stock market with great confidence. Sometimes he’s right. Sometimes he’s wrong. Sometimes he’s terribly wrong.

Recently, Roger’s made news in a particularly fawning interview with Business Insider CEO Henry Blodget. The article introduced Rogers as — you guessed it—”legendary investor Jim Rogers.” He lived up to his billing by predicting a market crash “in the next few years, one that he says will rival anything he has seen in his lifetime.”

When pressed for more details, Rogers was quite specific. The crash will occur “later this year or next.”

If that isn’t enough to raise your stress level, Rogers noted that he moved to Asia because of the potential for turmoil. His description of what is in store for western civilization is chilling: “You’re going to see parties disappear. You’re going to see institutions that have been around for a long time — Lehman Brothers had been around over 150 years. Gone. Not even a memory for most people. You’re going to see a lot more of that next around, whether it’s museums or hospitals or universities or financial firms.”

Other “legendary investors”

Bill Miller is often called a legendary investor. His Legg Mason Value Trust fund outperformed the S&P 500 every year from 1991 to 2005. His reputation took a hit in 2008 when his fund got clobbered by bad bets on the financial industries. Investors lost “all the value he’s ever created for the fund’s shareholders through the years.”

There may be no better known legendary investor than John A. Paulson. He made nearly $15 billion a decade ago when he placed a massive (and prescient) bet on the collapse of the housing market. Money flooded into his hedge fund, reaching $36 billion in 2011.

According to The New York Times, his firm recorded “nearly double-digit losses in several of its large funds as of the end of March.” Current assets under management have fallen to $10 billion.

David Einhorn, like Paulson, achieved legendary status by betting against the housing market. Since then, he’s has his ups and downs (like many investors). According to Forbes, he has “bounced back from his worst year since the financial crisis” with a 8.4% gain in his hedge fund, Greenlight Capital.

Wall Street is littered with terrible predictions from otherwise credible sources. Robert Zuccaro was part of a mutual fund team that achieved impressive returns in 1998 and 1999. That track record apparently gave him confidence to predict the Dow would reach 30,000 by 2008. So much for market timing!

In a similar vein, Kevin A. Hassett, one of Mitt Romney’s economic advisors, co-authored a book published in November, 2000 in which he predicted the Dow would reach 36,000. He may turn out to be correct, but he was way off in his timing (by several decades) .

At the other end of the spectrum, in 2011, perennial bear Harry Dent predicted the Dow would fall below 10,000 in the near term before crashing to 3000 in 2013. The Dow had its best year in over a decade in 2013. It closed at 21,271 on June 9, 2017.

“Legendary” doesn’t mean “accurate.”

Rogers’ dire prediction may turn out to be 100% correct. No one knows. That’s the problem. Because the direction of the market is random, and often influenced by tomorrow’s news, it’s unpredictable. Accurate predictions are likely a function of luck and not skill.

Instead of relying on the musings of “legendary investors” or others, focus on factors you can control: Your asset allocation, diversification, keeping costs and fees low and deferring or avoiding taxes.

Just because an investor is “legendary” in their own mind, or is characterized as such by the media, doesn’t mean their predictive powers are any better than yours.

The Two Most Dangerous Words For Investors blog was originally posted on The Huffington Post website.

 

2014-04-01-Hiresfrontbookcover.jpgDan Solin is a New York Times bestselling author of the Smartest series of books, including The Smartest Investment Book You’ll Ever Read, The Smartest Retirement Book You’ll Ever Read, The Smartest 401(k) Book You’ll Ever Read and his latest, The Smartest Sales Book You’ll Ever Read. He is a wealth advisor with Buckingham and Director of Investor Advocacy for The BAM ALLIANCE.

The views of the author are his alone and may not represent the views of his affiliated firms. Any data, information and content on this blog is for information purposes only and should not be construed as an offer of advisory services.

 

 

By: Dan Solin | 0 comments