09/21/2010 08:04 pm ET | Updated May 25, 2011

Hall of Shame

I have to give the securities industry a lot of credit. They are able to convince investors to rely on their "advice" despite a record of costing their clients huge losses. Remember the bankruptcy of Orange County, California? Or the trillions of dollars lost when technology stocks crashed? How about the analyst fraud scandal?

Of more recent vintage, we have witnessed the collapse of major players in this industry due to reckless trading in the subprime debt markets.

Investors seem undeterred by this dismal track record.

The industry encourages this cognitive dissonance by pumping out new products and gimmicks designed to separate clients from their money. Here are some of the most egregious examples:

1. Actively managed ETFs. This is an oxymoron. Only a tiny percent of actively managed mutual funds beat their benchmark indexes over the long term. There's no reason to believe an actively managed ETF will do any better. Here's an excellent example, reported by Allan Roth. Harry Dent ( who once predicted the Dow would reach 40,000), formed the Dent Demographic ETF (DENT). The fund was guided by a "proprietary and demographic analysis." Through September 15, 2010, it lost 2.22%, significantly under performing an index fund that simply tracked the Wilshire 5000 (which was up 9.55%).

2. ETFs with a narrow focus. My favorite in this category is Global X Lithium (LIT). It's benchmark is the "Solactive Global Lithium Index". Clearly the inmates have taken over the asylum. As noted in an article in Financial Advisor Magazine, ETFs are being created in other obscure segments of the markets, including rare metals and companies engaged in fishing. Investors in these funds are betting they will outperform other segments of the market. They may be right or wrong, but they are gambling, not investing.

Underlying the appeal of these investments is the strongly held belief that someone can beat the markets. Your friendly broker and the financial media continue to entice you with new products and "advice" feeding into your desire to achieve higher returns, without assuming more risk. Esoteric ETFs are the perfect bait.

Here are some others:

  • Hedge funds;
  • Structured products;
  • Actively managed mutual funds;
  • Highly rated Morningstar funds;
  • Junk bonds;
  • Private equity deals;
  • Limited Partnerships;
  • Web sites that make it easier to trade with gimmicks like graphics which show you "where the action is";
  • Individual bonds, including individual municipal bonds;
  • Variable annuities;
  • Equity indexed annuities;
  • High dividend stocks;
  • Any individual stock;
  • Preferred stock;
  • Stocks of "excellent companies";
  • Anyone who talks about "the lost decade";
  • Anyone who believes the S&P 500 is an appropriate benchmark for the U.S. stock market.

Smart Investing is mostly about understanding what not to invest in, and who not to rely on.

The views set forth in this blog are the opinions of the author alone and may not represent the views of any firm or entity with whom he is affiliated. The data, information, and content on this blog are for information, education, and non-commercial purposes only. Returns from index funds do not represent the performance of any investment advisory firm. The information on this blog does not involve the rendering of personalized investment advice and is limited to the dissemination of opinions on investing. No reader should construe these opinions as an offer of advisory services. Readers who require investment advice should retain the services of a competent investment professional. The information on this blog is not an offer to buy or sell, or a solicitation of any offer to buy or sell any securities or class of securities mentioned herein. Furthermore, the information on this blog should not be construed as an offer of advisory services. Please note that the author does not recommend specific securities nor is he responsible for comments made by persons posting on this blog.

Here is the trailer for my new book, Timeless Investment Advice.