Let’s call my client “Rudi “ and I will discuss his investment logic with you. Rudy mainly invested at Fidelity. His logic was to be fully invested most of the time with a diversified portfolio of high performing mutual funds. He monitored each fund every day. He would allow each fund a modest amount of normal fluctuation. If an abnormal fluctuation greater than about 5% occurred, he would exchange out of the poorly acting fund and move into a temporary position in a money market fund. His list of funds would include aggressive growth funds when markets were low and a greater portion of more slowly growing defensive funds when markets were high and momentum was slowing.
Later on in his investment career, he learned how to accumulate larger positions in winning funds and ETF’s by buying into shorter term market declines and selling partial positions into abrupt high velocity advances.
There are a number of reasons why a 401K or 403b participant would not likely achieve Rudy’s success, but all of them have to do with knowing how the investment game works. If you do not know the game as an insider, you are unlikely to beat the game.
Remember the story of the road. There was a fork in the road and a decision had to be made by the traveler. The first traveler picked the road most travelled by and did not fare well. The next traveler met one who knew the road and picked the one least travelled by and that made all the difference.
Stock brokerage firms, insurance companies, mutual funds and advisors are always promoting stocks, mutual funds and ETF’s that have risen to high prices. Rarely do you see a promotion for an asset priced low, trading in a narrow range like Apple was when it was $12 and had just about as much in cash per share as the price of the stock.
Look at the Chart below:
The Psychological Profile of a Stock
Let’s Look at some of the financial roads most travelled by:
Big corporations like banks, stockbrokerage firms, mutual funds and insurance companies are seeking big and growing profits for their shareholders.
Unfortunately they may be profiting off of instead of with their clients. Have you ever heard the expression: “Where Are the Customer’s Yachts”. Insiders and advisors are often found protecting themselves as they continue to advise others to take additional risks. This is one of the reasons people monitor insider trading.
MOST INVESTOR’s ARE NOT GETTING WHAT THEY ARE PAYING FOR:
- Index annuity investors often have caps that limit their gains to a minimal return, yet they have high surrender charges and salesmen earn high commissions. Results may not offset inflation.
- Advisors help investors allocate monies and charge a management fee higher than the managers that actually manage the money. Often, there are two levels of fees. The mutual fund fees plus the advisor fees. Variable annuities managed this way are even worse. 4% or more for annuity costs plus advisor fees are often the case.
- Some advisors still charge front end commissions on mutual funds purchased or “C” shares where the salesman gets paid immediately and the customer suffers higher fees and a surrender charge. Advisors can often purchase the same fund for their client in a lower cost version with no commission but choose not to do so. Today 401k and 403b plans offerfunds with lower cost fees. You don’t have to pay anyone commissions.
- Large brokerage firms have wrap fee accounts for a one or two percent fee and they often use their own firm’s funds so they can earn more. These may be funds that would not be selected on merit alone.
- Trade costs may appear low at many brokerage firms, but execution prices may be higher because of hidden commissions back to the broker by the trading firm used.
- Index Funds have lower costs, but during periods of neutral or declining markets may not overcome inflation. From the late sixties to the early eighties the indexes made little progress. More recently from 2000 to 2010 there was a lot of volatility but little progress. Compared to traditional mutual funds, index funds have performed better, but in longer term declining markets it is like marching in formation on the front line like a British soldier in the Revolutionary War, lined up side by side and easy to shoot.
As an investment advisor myself, I have been asked many times to look over investor’s accounts. Often the person has had the same advisor for many years. They have a feeling something is not right but they can’t quite put a finger on it.
What I have discovered is that most often they have experienced moderate performance in good years and negative performance in declining years. If they take withdrawals when values are down, it takes years to recover.
THERE ARE THREE MAJOR ISSUES:
- Assets are not protected against longer term declining markets.
- Fees are too high for the level of performance attained.
- Although assets may be diversified, too much risk is taken and the risk is not understood.
You should be concerned, because unless your portfolio is generating positive alpha, considering your management fees and other costs, your money will not grow fast enough. Tony Robbins in his new book, “Money Master The Game”, explains it well. Mutual funds and advisors often charge 2% in management fees and about 1.25% in additional costs. Since most do not beat the indexes over a long period of time this cost is substantial. Example: If the S&P 500 averages 6.5% over 50 years in an index fund with expenses of .05% in fees , $1.00 goes to $30 in 50 years. Netting only 5% after fees, 1.00 goes to only $10 in 50 years. Considering that half of the gain is from dividends, higher fees more than offset the dividends.
Once You Consider the Problems and Quantify Them, You Can Easily do better!
You need to invest in a way that gives you positive alpha net of advisory fees. Positive alpha means you are earning more than the market over the long term. You need to follow a disciplined investment process that offers a multiple unit of return for each unit of risk you take. You must be diversified and have a plan for risk control on every asset you hold. You must take personal responsibility for your money regardless of who you hire to manage it. The result should be a rate of return that beats the market over the long term. This process requires that you learn the rules of the game and be vigilant in protecting your assets from those who make their living off of and not with the average investor.
Our mission is to mentor you in this process and help you to recognize the difference. Our process centers around buying low with a plan for risk control on each asset you hold. We will help you to learn the process. You must look back at history to believe what we will teach you. We will show you how to do this. You should then start slow using a conservative implementation of our strategy progressing from education to knowledge.
There are many myths that are communicated to investors. One is that stocks go up if future earnings rise. History shows that stocks peak a year or more before earnings peak, thus investors are misled about the risks they take allowing them to take comfort by buying high.
We are independent of any big corporation. Our success is based on your success. If we perform for you we earn more. If we do not perform our clients will leave us.
I have had 45 years of experience as a financial advisor. I have worked with thousands of investors over my career. My advisory company was one of the first advisors to be able to buy mutual funds with no commission as early as 1988.
Actually helping investors to use this knowledge effectively has been much more difficult than I imagined. Investors were easy to motivate to act, but soon did things their own way. They sold out when they lost faith or when they decided to buy assets they imagined would be more exciting. Some, often engineers made enormous profits, because they understood the logic and had more patience. Some people actually went into business to advise others , but did not fully understand the process themselves. It took me a lifetime to learn how to educate and guide people to the knowledge they need to execute a successful strategy long term. Being an aggressive investor myself with a lot of confidence and experience, I found the solution very difficult for me.
In short, the solution is to help people through the process of learning, doing their own homework and then guiding them through a conservative process until their experience gives them actual knowledge.
A recommended solution is to use a core, high income asset. Put perhaps 50% in this type of investment and invest the remaining 50% in a diversified portfolio of mutual funds bought at discounts from their highs. Do not over invest by taking too much risk all at once.
Even the core income fund must have a plan for risk control monitored daily. Today, our core high yield taxable funds are invested yielding close to six percent. The objective is to build an income stream in addition to your growth investments and to keep your money working when you are waiting to buy low.
Source: U.S Census Bureau, Saperston Companies, Bankrate 2014.
Ave Retirement age: 62
Ave length of retirement 18 years
Cost for a couple over 65 to pay for medical treatment for a 20 year span: $215,000
Percentage of Americans 30-54 without enough savings for retirement: 80%
Number of people considered wealthy at 65: 1%
Number at 65 with adequate retirement savings: 4%
Number dependent on Social security for survival or on others: 63%
Number dead: 29%
If your investment logic is typical of most plan participants, you must change your current investment logic or you will likely have a similar result. Even if you feel more confident today, because of the past six year market rise, you shouldn’t, because the next market decline is coming very soon.
Make an on line appointment with Bob today by clicking the red bar. We can help point you in the right direction.