Monday, September 17, 2007

Lies Brokers Will Tell You

Personal financial advisers will tell you many lies. Some of them will tell you that you'll be better off investing in actively managed funds, some of them will explain that there is a reason to invest in load funds that charge you a fee for the pleasure of buying their shares. I will not speak about these big lies. Instead I'd like to speak about a small lie that I find harmless but annoying.

You must have heard at least a dozen versions of this lie, but here is the most recent version that I have heard. The following quote actually comes from a good article that I quoted from a few days ago, taken from Charles Schwab "On Investing" Magazine . It goes like this:

"...I showed a chart highlighting that if you missed the top 40 best single market days (less than 1.6 of trading days) over the past 10 years, your annualized return plunged to -6.4% versus the S&P 500's +8.4%."

So what's wrong with this statement? It's very simple. This statement assumes that you missed the top 40 days, but were somehow able to hit every single one of the worst days. Well, if by some black magic you were able to accomplish this feat, you would be the person with the worst luck who has ever walked the face of the planet. In fact, if you are able to do this, stay away from me, because there is a good chance you will be hit by a meteor and a lightning bolt on the same day. Reality is that if you are out of the market, you will miss both the good days and the bad days in equal measure. Removing only the good days from the calculation vastly overstates the problem.

So called financial advisers frequently use this lie to push people into putting their money in the market even in bad times. I completely agree with their underlying goal: people should systematically continue to invest in the market, regardless of whether the market is having a good year or not. However, there is no reason to overstate the facts or come up with impossible scenarios to encourage them to do so.

1 comment:

frugal zeitgeist said...

I've also been blogging about an experience I've been having with a financial advisor. It turned into an object lesson about knowing enough to make one's own decisions instead of blindly trusting the so-called "experts." It's so important to always be on the lookout for demonstrated competence and hidden agendas.