Sunday, February 08, 2009

Do Financial Advisers Challenge Your Sanity?

I would like to take a moment to challenge the sanity of financial advisers or at least their logical inconsistencies.

Four things I hear incessantly from most if not all financial advisers...

- Buy and hold
- Stay invested in equities
- Past performance is no guarantee of future returns
- It is a mistake to believe that "things are different this time".

I was recently "fired" as a potential client by an advisor selling Variable Annuities because I challenged him on the viability of these cherished commission-generating anachronisms in a crumbling equities market.

Buy and hold may be good advice for folks in their thirties and forties. But not so much for folks in their sixties and seventies. History has shown it takes an average of 5 to 10 years for investors to recover to their former position after a 30 to 40% market decline. Why would an old fart relying on his retirement stash want to gamble away his survival kit in a down market, believing that "history shows the market will recover." The modified old adage is "you can't take posthumous gains with you."

Stay invested in equities. This is a good one. The advisor was talking this one up while trying to convince me that a Variable Annuity requiring NOT LESS THAN 35% of the invested funds to be invested in EQUITIES was the way to go - in this market!!!! You've GOT to be kidding. I reminded him that even BONDS declined in value along with stocks this time. The old balanced portfolio trick relying on bonds going up when stocks go down didn't even work this time. They all tanked. The advice to keep a major chunk of cash in equities is even worse!

The latest pitch designed to bolster the courage of burned investors demonstrates market recoveries after every down market. One example compares post-decline recovery between an account fully invested in equities, and an account fully moved to a fixed 5% investment after initial loss in equities. "See how much more equities recover in 5 years?" the advisor grins with awe. "See how foolish you would be to get out of the equities market?" he warns. All the while I'm thinking, "see how foolish it would be for sixty-year-old retirees to stay in equities when the market is still declining, when no one yet knows how deep the recession/depression will get, and they might not live to see a market recovery?"

Past performance is no guarantee of future returns. This is a required small print warning at the bottom of every investment product ad and salesman's' flyer. Yet every ad and every pitch focuses on past performance. As described above, past performance is illustrated to convince investors that "markets always recover." I don't believe that anything is "always", especially markets. Especially the markets that are showing so many "firsts", so many "this has never happened before's", so many "these companies are too big to fails."

And the clincher coming from one advisor: "You are a fool to believe that "things are different this time", strongly inferring that nothing is new, that recovery ALWAYS occurs like clockwork. Please refer to "these companies are too big to fail", above.

The fool is the one who gives away not only his retirement funds, but his gift of logic and common sense and all the wisdom he has acquired over the past 60 years to one whose full time objective is to get 6 to 10% commission for providing canned, anachronistic, and illogical advice.

There are opportunities in this market. As a young but wise administrative assistant consistently warned me as I left the building to go to meetings: "Be careful out there - there's lions and tigers... and bears...and wolves."

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