I think we have all had the frustrating experience of asking someone a question, and sometimes asking the same question multiple times, and getting a response that just doesnt answerthe question youd really like to have answered. A woman I am working with, when she went to discuss some problems she was experiencing with her 401k plan with her benefits manager got answers to questions she hadnt even asked. The answers she got were the right answers to the wrong questions her benefits manager, merely,perceived she was asking.
If Diane had asked the question, whats my funds returns year to date?10% would have answered the question correctly. If she had asked the question, wheredoes the fund I am investing in rank amongst its peers?In the top 15%, would have been the right answer. Unfortunately, those werent the questions Diane was asking at all and neither the benefits manager or Diane are getting answers to the questions that would reveal the real problems that are prevalent in their companys 401k plan. Frankly, both Diane and her benefits manager are in the same boat, they are both getting the right answers to the wrong questions, so please do not read into this that the villain hereis the benefits manager. They are both victims.
In doing an analysis of Dianes 401k planwe saw that 62% of her money is invested in U.S. Large Company Stocks. This was a fund that when sheenrolled in the plan, the rep told her, was designed to be allocated for someone in her agerange and length of time to go before retirement.Rather than getting answers to the questions, What investments should my money go in, or are these funds any good, Diane and her benefits manager need to be asking other questions.Theydbe much better off if they would ask questions like:
-How does the market work? Where do market returns come from?
-How can I get a mathematical measurement of just how diversified I am?
-Whats the mathematical measurement of riskfor the investments I am considering?
-Whats the long-term expected rate of return of the portfolio I am considering?
In asking those questions, Diane, her benefits manager, and every other investor would be asking the questions that would put them more in control of their investing. They wouldnt put so much stock in rates of return or rankings, things that mean absolutely nothing in terms of making good investment decisions. As it is Dianes benefits manager is giving her assurances in a fund that has way more volatility than she had previously been aware of. Over the course of the past 40 years her current portfolio has, on three occasions, taken a loss of 30%. She is, also, taking a lot more risk than she has to for the long-term expected rate of return of her portfolio. What good will a five star ranking do her when she experiences a 30% loss? Besides her, who else in the companys plan is walking around completely in the dark about their 401k plan?
This situation isnt exclusive to Diane and her benefits manager. Pick up a magazine, watchan investment commercial on television,or any literature from an investment company. The mutual funds are ranked from best to worst performing. The awards theyve been given are proudly displayed and touted as the reasons you should invest your money with them. These are the answers to questions like, what did the fund do over the last one, five, or ten year periods of time orwho should I hire to manage my money this year?These are answers that give a sense of credibility to the investment companieswhichmakes it easier to sell their funds. They dont make it any easier to be a successful investoror gain confidence, clarity or peace of mind. These are the wrong questions to be asking and there is a terrible cost to be paid for making decisions after having asked the wrong questions.
Brendan Magee is the founder and president of Inevitable Wealth Coaching. With questions or comments call or e-mail.
Solving Inside Investor Problems WithOutsideSolutions Just Doesnt WorkBy: Brendan Magee
People Magazines July 2013issue highlighted the struggle and triumph Matthew Perry (Chandler Bing on the hit sitcom,Friends) experienced in overcoming his 10 yearaddiction to drugs and alcohol. He spoke about the catharsis he had, that moment when he finally got on the road to recovery, and finally got what friends and professionals had been telling him for years. His story is one that investors can learn a lot from.
Like a lot of investors wanting to invest their way, Mathew Perry wanted to handle his recovery his way. When life was getting out of control, Perry made changes, and with being paid $1 million per episode he could afford extravagant changes to his life. He bought houses and moved a lot. In his words, If I just lived over there, Id be fine. When investors arent seeing the results they want, they often make changes to their portfolios. The Dalbar Study for 2012 showed that on average investors make a change to their portfolio within a three year period of time. As Perry puts it, It was/is a classic case of trying to fix inside stuff (problems) with outside stuff.
Recovery forPerry didnt startuntil he had an insiderevelation, and for most investors becoming a successful investor wont happenuntil they have a similarcatharsis between their ears as well. His recovery coach, Earl Hightower a leading interventionist and addiction specialist, had been working with Perry for years preaching the same message with little results to show for it.Perry, one day saw it clear as day, the changes he wanted to achieve in his life werent going to occur until he stopped trying to do things his way. From that point on, Perry said, I was willing to do whatever Earl Asked me to do for the rest of my life.
By itself, here is an invaluable lessonto know if you have a coach you can have a life long relationship with or you are merely doing business with an advisor looking to sell you products. Does their message change or is it still basically the same. Over 500 times Hightowers message to Perry was the same. An investor coachs message will also stay consistent.Own equities, diversify, buy low sell high and at no timeengage in stock picking, market timing, or track record investing.Any deviation from this and you do not have a coach. You have someone who is going tell you what you want to hear to keep you as a customer, not make sure you hear what you need to hear in order to be a successful investor.
ForPerry, being a huge television star, there was no shortage of opportunities to drink and do drugs and his life quickly spun out of control. For investors, there is no shortage of investment products that can quickly turnan unsuspecting, trying to the right thing, investorinto a gambler and speculator. There are 27,000 mutual funds to choose from, there are internet trading web sites to log onto, as well as over 600,000stock brokers trying to lure you to their services. Like drugs and alcohol they are not readily labeled as things that can ruin our life. Stock picking, market timing, and track record investingperpetuate theillusion that these are things thatwill enhanceyour life. Drugs andalcohol abuse are two activities that will eventually, inevitably destroy a person. An investor who engages in or cant tell thedifference between prudent investing and gambling andspeculation will eventually see their financial securitydestroyed.
As it was for Perry, the days of going to work painfully hung over andseeing personal relationships destroyed are problems in and of themselves, but in reality theyweremerely the symptoms of a much bigger internal problem.As Perry found out if he didnt deal with the internal problem of addiction, the symptoms were going to get more severe and damaging. Investors need to take a similar actions.
They need to be able to identify and deal with the bigger problems not just symptoms.
Along with gambling and speculation, if you havent defined your investment philosophy, if you havent identified your true purpose for money, and you dont know exactly what you are doing when it comes to building your portfolio, yours is more of an internal problem than an external problem. Trying to find solutions by, solely,making changes to your portfolio, any success you experience will be temporary and the problems that led you to make those changes, disappointing returns, massive losses, no accounting for costs, confusion, anxiety, and worry will come back stronger and be that much more severe.
In dealing with the internal problem of addiction, Perry says he is in a good place and really feeling comfortable. When, as an investor, you focus your attention on yourself as an investor, and ask the questions you really need to start asking and getting the answers to, thats when you will begin to experience truepeace of mind.
Brendan Magee is the founder and president of Inevitable Wealth Coaching. With questions, comments, or suggestions, call or e-mail.
Does Your Brokers Recommendation ComingWith No Accountability?by: Brendan Magee
I am in the midst of reading a very informative book, Brokerage Fraud, What Wall Street Doesnt Want You To Know, written by Tracey Pride Stoneman and Douglas J. Schulz, and I like to share an interesting tidbit I picked up in my reading.
I think all investors realize to one extent or another that theinvestment industrys objectives and the investing publics agenda are in conflict with one another. The investor wants the truth on what is the best way to invest their money, keep costs down, take as little risk as possible, and get adecent rate of return. The brokerage industry wants to be profitable. They want you to buy the stocks, bonds, mutual funds, and investment products they sell.To accomplish this, they need to get your attention and make their products lookirresistible. However,investors want to be advised, not sold. They want the inside scoop on what isgoing to do well and what is going to tank.
The brokerage industrys response is to offer investment analysis.They hire analysts to track stocks, different markets, and spot trends that will give their investors the edge. InBrokerage Fraud,Schulz recalls in his days working for Merrill Lynch that on every Monday morning there would be a conference call played throughout the offices p.a. system,where Merrills analysts would list the stocks, companies, markets, and market sectors they were recommendingthe brokers to sell andinvestors to buy.That particular week, these were the recommendations the brokers were going to make to their investors. The analysis gave the brokers recommendation a layer ofcredibility that would make it easier to sell to their investors.
Stoneman Pride and Schulz write,One little known fact that isnt made readily available to most investorsis that, generally, research analysts that work for the brokerage housesdo not have any accountability. Where a stockbroker must have a reasonable basis for recommending a stock or investment toa customer, no rules orregulations dictate what an analyst says or what must be in a research report.No securities rule or regulation applies to the analyst because they do not hold a securities license. They operate with relative impunity.
So if the brokerage house has been hired and paid hundreds of thousands of dollars to sell the stock of a publicly traded company, what do you think they are going to want their analysts to say aboutthat particular company?Is the brokerage firm going to continue to have a profitable relationship with the company if the analysts use language like buy, attractive, hold long-term or sell, dump, get out?
This puts the analyst and the brokerage house in the position where the truth might serve the investors best interests, but not the brokerage houses profitability.
Perhaps, if investors understoodtheir brokers recommendations were coming from someone who is perhaps more beholden to the firm then the investor andthat no rulesor regulationsapply to analysts recommendations,they might not put as much faith in their brokersadvice.
So as Stoneman Pride and Schulz say, Buyer Beware!
Brendan Magee is the president of Inevitable Wealth Coaching. With questions or comments call or e-mail.
What 401k/403b Plan Participants Cant See & Why Its So Dangerousby: Brendan Magee
Ill admit it. Once in a while for fun, I like to watch the Three Stooges. I especially like it when oneof the Stooges covers up a hole in the floor and some unsuspecting charactersteps on the rug and falls through the floor. Since no one ever seems to get hurt,its quite comical.
What isnt comicalis 40lk/403b participants walking around with a very dangeroushole in their retirement accounts. Unlike the Stooges, whatinvestors cant see is dangerous and can dopermanent damage, and heres the thing, the 401k/403b participants I have recently metwith are not Stooges by any stretch. They are lawyers, successful businessowners, principals of education, and people with post graduate degrees.
What I have seen is there is no attention given, nor education into the cornerstone of all investing,DIVERSIFICATION!One gentleman has 75% of their portfolio invested into individually ownedU.S. Small Company Stocks. Now this gentleman has already seen his portfolio take a 50% drop in value, he knows he is notappropriately diversified, but has no idea of what a properly diversified portfolio looks like. Worst of all, he had his portfolio put together by a trustedfinancial advisor.He hasnt been given any education or gained any understanding ofdiversification. What will he do if the minus 50% happens again just as he and his wife are getting ready to retire? What investments has ever generateda reboundedof 100%? Answer: None.
A lawyer who I met with and reviewed their 401k plan told me she asked the company representative to help her pick the investments for her 401k plan. They picked a Life CycleFund and shehad no reason to doubt the sincerity or the credibility of the advice she had been given. As it turns out, 68% of her 401k plan is invested in U.S. Large Company Value Stocks. This is an asset class thathas gone up by as much as 37%, but has also seen years that have been a negative 37%. Thishighly educatedwomanis walking around without any clue that the most serious money she owns is sitting in such a volatile position. When does the shoe drop? What portion of her portfolio is in a position to offset 68% of her portfolioabsorbing a37% loss? Answer: No portion is going to offsetsuch aloss.
Lack of diversification alsoaffects a persons ability to keep up with inflation.An early forties aged couple showed me their retirement statements. Since 2007 her husbands portfolio has lost one percent in purchasing power for every year he has owned the account. Not onlyhas he unknowingly been paying a one percent insurancecharge along with all the other investment fees, half of his money is in a fixedinterest account. Whilesince 2007 until today, U.S. Large Company Stocks have gone up 58.60% and U.S. Micro Cap Stocks have gone up 41.42%, 50% of his account has been stuck doing a measly two percent and has not benefited one bit from the stock markets run up. He cant go back and make up the returns he didnt capture and he cant go back and undue the damage the cost of living has done to the value of his retirement account.
To make matters worse, the wifes 401kplan has62% of her retirement account in U.S. Large Company Stocks. Remember 2008? Remember U.S. Large CompanyStocks going down by 37%? Do you think this wont happen again?How does a person recover from62% of their retirement accountgoing down by37%? Answer: They dont. All the possibilities that were availablewhen retiring on a certain amount of money are gone. Sure, this couple, like many others, willadjust, but what a tragedy to learn that all youhad to give up was completely and easily avoidable with a better understanding of what it means to be diversified and how to achieve it.
Now as I pondered two weeks of seeing 401k/403b participants with little to no understanding of how poorly diversified they were and the jeopardy it put their retirement in, I wondered how much of the $14 trillion dollars Americans have invested in these plans is in the exact same position? How bad could it get? How will people ever get the coaching they need when apparently the participant cant see the hole in their retirement plans and the mutual fund companies are merely throwing a rug over the problem?
Plan participants and their employers have got to start paying more attention to the conversation that is being directed towards their participants. Less attention has to be given to the five star funds that populate their investment options and be more concerned as to whether or not they are being asked the right questions. Do they understand how to measure diversification in their portfolios? Do they fully understand the implications and applications of diversification in their portfolio? Getting the answers to these questions might not be as convenient as throwing a rug over the hole in the floor, but they are going to help investors see the holes and dangers they werent able to see previously. They will be more fully engaged in creating their financial security and have the control where it belongs, in their hands, not in any one elses. Ultimately, investors will be experiencing a whole lot more peace of mind.
Brendan Magee is the founder and president of Inevitable Wealth Coaching. If you have questions or comments call or e-mail.
Andy Murrays Win Was All About Skill, Not Luckby: Brendan MageeJuly, 2013
Last Sunday I was watching Great Britains Andy Murray become the first British tennis player towin the Wimbledon Championship since 1936. It was an epic final pitting Murray against former champ Novak Djokovic. I was amazed as I watched these two guys pound shot after shot at each other in a match that lasted more than three hours.
As I watched the match, I was left with the thought that nothing about the match was a coincidence. That the match was so close, 6-4, 7-5, 6-4, that each game seemed to last 45 minutes, and that these two guys had made itto Center Court in the championship match of the most prestigious tennis tournament in the world was all about skill.
Andy Murray has been playing tennis since he was six years old. He has hit thousands of forehands, backhands, serves, volleys, and overheads. Plus, he goes through an extremely grueling training regimen that allows him to survive three to four hour matches under grueling conditions. The same can be said of Djokovic and all the top tennis players. They have developed a skill that is repeatable, reliable, and measurable.
Unfortunately, for investors with the maze of statistics the investment industry throws at people it is easy tobelieve the results the mutual fund managers are achieving are the result of skill as opposed to pure luck. If you look atthe top 25 performing mutual funds weoften see some pretty familiar names consistently. We see Vanguard,Fidelity, T. Rowe Price, but what investors often dont do is take notice of the name after the fund. We dont take time to see if for example Fidelitys MagellanFund has stayedin the top 25 from the previous list.We dont take notice of whether or not it was Vanguards Windsor Fundor their Wellesley fund that has maintained its earlier ranking. If we did we might, rightly so, see thatthe skill we perceived the mutual fund companies to have, isnt a skill at all.
Heres the statistics, asmeasured by Morningstar a givenyear only about a third of all mutual funds will outperform its benchmarks, and each and everyyear the third that outperformedits benchmarkthe previous year has been replaced by a new batch of top performing funds. It gets even worse the longer time frame. In any ten year period of time, none of the funds outperformedtheir benchmarks. Andy Murray can measure per match how many first serves he can get in, and he can measure how many points he can rely on winning as a result of a certain percentage of successful first serves and it is measurably reliable. So why cant the best educated financial minds of the investment world consistently achieve superior results?
The answer lies in what they are engaged in and what they are doing with investors money.
A tennis player can learn the right way to hold a racket and the motion necessary to hit a topspin forehand and then go practice it until they get it right. They have control over how much facility they will develop. A mutual fund manger can look at the books of a publicly traded company, they can attend stockholders meetings, talk to executives of a company, read reports about a company, and solicit opinions of their colleagues, but none of that will give them more control over their stock picks.
That is because everything they are reading is based on something that has occurred in the past, and with that information they are trying to figure out what is going to happen tomorrow, next month, next year, the next 20 years, etc. There is no one who has control over tomorrow no matter how much research or analysis they put into it. It is why the Prudent Investor Law of 1990 states,Bargain shopping in an attempt to separate the winner from the losers through forecasting and analysis is deemed wasteful.I wouldnt want my life savings any where near a prediction or forecast about who is going to win next years Wimbledon title.
Its not the easiest thing for investors to do, to rise above what is worthless rhetoric as opposed to valuable investment advice. The recipe for investors is to be able ask and answer the right questions. In the case we are using today, investors want toask, can you identify the warning signs that you are gambling and speculating with your money vs. prudently investing it? If you can you will go along way towards avoiding investment advice that is dependent on a prediction and save yourself a lot of wasted time and money.
Brendan Magee is the founder of Inevitable Wealth Coaching. With questions, call or e-mail
U.S. Open: Great Golf Drama, Misguided Investment Messagesby: Brendan Magee, June 2013It would be hard not to get caught up in the drama of this past weeks U.S. Open Golf Tournament. Could Phil Mickelson finally breakthrough and win his first U.S. Open after so many heartbreaking runner up finishes? Would one of the other golfers finally win the first major tournament of their careers?Golfers and nongolfers around the country watched with baited breathas every shotcould determine who would wind up victorious.From the standpoint of riveting drama, the U.S. Open delivered in spades to its viewing audience.What the tournament also delivered was some poorly framed investment commercials, and as I watched the commercials I wondered how many investors got caught up in their misguided messages. One in particular stood out to me. There was a couple sitting across the table from a financial advisor and they were trying to get their nerveup toas they said to, Start investing again. Their fate was portrayedthat as the markets went throughsome rocky times, they took their money out of the market andnowwas the time they had to get back into the market.AsI watched the commercial I was wonderinghow many people could identify with this couples plight and were in the same boat trying to figure out when they should get back into the market. I also wondered how many people realized this couple in trying to solve their dilemmawere working on the wrong end of the problem. Heres what I mean by that.Go back to 2008, the stock market was in a free fall. U.S. Large Company Stocks went down by 36 percent. U.S. Large Value Stocks went down by 40.74 percent. U.S. Small Company Stocks went down by 36 percent. Globally, markets were in complete free fall. You couldnt find a news outlet that didnt say the end of the world was about to occur.The couple in the commercial and real life investors saw their life savings take a beating, got scared and took their money out of the market. In October 2008, investors took$58 billionout of the market (As noted by the Dalbar Corporation)and investors waiteduntil the market settled other words, they waiteduntil the market went back up.So investors sold low and now are committing the sin of buying high by getting back into the market after the rebound. In and of itself this is investment suicide, but to make matters even worse look at the returns investors waiting on the sidelines have missed out on going back to January 2009 through June 19th, 2013.U.S. Large Company Stocks are up 58.60 percent. U.S. Large Value Stocks are up 125 percent. U.S. Small Company Stocks are up 130 percent, and Emerging Market Stocks which were down 49 percent in 2008 are up 88.33 percent since January 2009. Investors who got out of the market in 2008 or early 2009 made the impact of their losses permanent. Even if they got back in today it will be impossible to make up for missing out on the spectacular returns of the past three to four years.The lesson to be learned is not panic and get out when markets go down, not try and figure when is the right time to get back inBrendan Magee is the founder and president of Inevitable Wealth Coaching. With questions or comments call or e-mail.
Brendan started in the financial services field with Prudential Insurance in 1989. Went in to financial planning with The New England Financial Group in 1991. One of the 30 original pioneers in the field of Investor Coaching.
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