Avoid Wall Street’s “Culture of Corruption”
Morgan Stanley thinks you’re a dumb investor. Although it’s one guy’s opinion, that opinion doesn’t fall far from the tree. It’s a culture of corruption and everyone should know about it. I take on Wall Street everyday, and I will oppose the evil that they push. There is a right way, and a wrong way to invest. I prefer the right way, and hope you do too!
Does the Financial Industry Consider Investors “Dumb?”
Are you a “Dumb” investor? You may not think so, but many in the financial services industry think so, and count on it.
In a recent article http://www.businessinsider.com/morgan-stanleys-gerard-minack-retires-2013-5, Morgan Stanley’s Gerard Minack gives his swan-song retirement speech by thanking investors for being “dumb” and providing for his retirement. What is it that makes investors “dumb?”
There are two main items that make investors “dumb”:
1) Investors think actively-managed funds that have done well in the past will do well in the future.
2) Investors, because of behavioral biases, will load up on the highs and sell at the lows.
As a result, investors will underperform the very investment that they are investing in.
The evidence is overwhelming. Actively-Managed Mutual Funds underperform the indexes. The Financial Industry has to provide the illusion that their fund managers have the ability to pick winning stocks. This illusion only works because many amateurs persist in trying to beat the market, and believe there is a “Guru” who has the ability to outsmart the market. The evidence suggestions that managers buy and sell stocks with your dime and you lose – what a nice job.
A study completed at Zerohedge.com recently screened 24,711 funds on Yahoo Finance’s fund screener
and 17,785 funds on the Wall Street Journal’s online screening tool. The results were sobering,
to say the least: using a basic set of criteria, the first screen turned up a mere 5 managers who
beat the S&P 500 index over five years. Using a slightly different set of criteria, the second screen
found 71 funds out of 17,785 outperformed the index over ten years.
That’s .4% of managed funds, i.e. an index fund beat 99.6% of all fund managers.
So, the answer is simple- using Actively-Managed Mutual Funds is a major contributor in being “dumb.”
Would you do anything voluntarily if you knew you only had a .4% chance of success? My gut tells me you wouldn’t, so why would you invest in Actively-Managed Mutual Funds?
Investors (or brokers) believing they have the ability to “Time the Market” is an illusion (and “dumb” mistake) that keeps the brokers wealthy. Since the 2008 downturn, investors have left the market or have hesitantly returned slowly, only to be scared off at every bad economic report or scandal.
Since 2008 the Country has had a bank meltdown, two wars, IRS and other government scandals, high unemployment, low GDP (Gross Domestic Product), and a feeling of an uneasy economy. There is always something in the news that can scare an investor into selling out of the market, or jumping from investment to investment. However, since March 9, 2009, the Dow and the S&P500 have reached new highs.
Another “dumb” illusion is that past performance is an indicator of future results. The Financial Industry touts a star rating to mutual funds, funds that have done well in the past. A lot of stars makes a good fund, right? Unfortunately for investors, the knowledge that markets go up or down based on unknowable events and unknowable information eludes them and dictates that the recent past isn’t an indicator of the market going forward. Along these lines, it is easy to be convinced that someone else really does have the information, power, and insight to forecast the future. You could become an innocent victim of wish fulfillment. It would be so much easier if someone really had the answers; it is easy to lose sight of the simple fact that it is just not possible to predict the future.
Dalbar, Inc., a leading financial-services research firm, has demonstrated an investor’s performance does not equal investment performance. In 2013, Dalbar found the following annualized returns for the 20 year period of 1993-2012 investors, whose average holding period for a mutual fund was 3.31 years:
The average equity mutual fund investor realized an annualized return of 4.25%, compared to 8.21% for the S&P 500. Obviously, when this effect is compounded over a period of years, the potential for reaching financial goals is significantly decreased. These kinds of losses can’t help but create additional frustration and fear about the future.
There are three “dumb” strategies that keep investors from achieving wealth. Stock-Picking, Market-timing, and relying on Past Performance.
The biggest tip for investors, to truly grow wealth is to invest with passsively managed structured asset class funds, or indexes, and focus on asset allocation and your risk tolerence. If a professional advisor recommends actively-managed mutual funds, ask a simple question:
1) Can you provide the academic third-party evidence that backs your recommendations?
If the evidence can not be obtained in a split second, you may be a potential victim of “dumb” and the new income stream to a broker’s retirement!
As the legendary Paul Samuelson said, as quoted in The Little Book of Behavioral Investing by James Montier- “Investing should be dull. It shouldn’t be exciting. Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas, although it is not easy to get rich in Las Vegas, at Churchill Downs or at the local Merrill Lynch office.”