The Perfect Storm: False Prophets and Bad Advice

October, 2008 was a terrible month. For the prior twelve months, an all stock portfolio racked up losses of more than 43%.

In these troubled times, there is no shortage of advice for beleaguered investors. A well-known advisory firm wrote to its clients that "we have not reached the ultimate bottom" and a "larger rally will have to shake off the "sell the rally" crowd." Other pundits view the meltdown as a "buying opportunity" and are urging their clients to buy stocks "now."

Few of these advisors told investors to flee to cash and avoid the market crash. Do you really have confidence they are right now?

Advisors who want to be honest will tell their clients they have no idea when the markets will "reach the ultimate bottom." All we can realistically do is place the current markets in historical perspective.

Here is some data which is factual and not simply the musings of self-styled market seers.

The two year annualized loss in 1973-1974 for an all stock portfolio was greater than the two year loss for the period ending October 30, 2008 (22% vs. 18.64%).

The worst 4 year annualized loss for an all stock portfolio in the past 50 years was less than 2%.

The 4 year annualized loss for an all stock portfolio for the period ending October 30, 2008 was approximately 1%.

Over any ten year rolling period in the past 50 years, this portfolio never had a loss. Its average annualized return was over 13%.

While no one knows what the future will hold, this data validates a long term strategy of determining your asset allocation and holding a globally diversified portfolio of stocks and bonds using low cost index funds, Exchange Traded Funds or passively managed funds.

Instead of relying on the flawed predictive powers of those who shamelessly peddle this ability, consider this recent study. It reviewed the returns of 2,076 actively managed U.S. open-end, domestic-equity mutual funds that existed at any time between 1975 and 2006.

How many of these fund managers demonstrated the skill necessary to "beat the markets" and add value to their shareholders? A pathetic 0.6%!

What advice are you receiving from your broker or advisor? "Buy stocks" or "flee to safety"?

Here is the ultimate irony:

It is bad enough that they don't have the expertise to give you this advice. It is worse that they encourage you to hold actively managed mutual funds that have a minuscule chance of adding value to your portfolio.

It is the perfect storm: false prophets and bad advice.

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.

Comments

[JBS]

Kind of sucks though if your long term investment strategy was aimed at having a retirement nest-egg in 2009 though. I ain't looking forward to having to wait another 10 years.

[schatsie]

Don't be a bunch of suckers... The Big Boy InSIDERS are the ones who take the profits, the rest of us would do better investing in Treasury Bonds.....Free Market, my ass....

[dadw5boys]

HOW ABOUT A PLANNED PERFECT STORM LIKE THE 1929 CRASH ?

[OneSkeptic]

The market has bounced hard off a DJIA of 8300. It's approaching that level again this afternoon. If (rather when) if drops below 8300, things are likely to get very ugly.

[darthdarcy]

Never trust a broker or your lawyer, and never buy paper it's nothing but as they call it on Wall St. an air castle...

Buy real assets so you'll always shave something to show, I buy guitars and my collection far exceeds Wall st. and guess what i can play them but buy what you know about real property...land, cars anything it's always worth something..do not buy paper...you are literally risking every dollar you put into it...

Wall St. is nothing but a bunch of well dressed swindlers...

[noneIn2008]

With the coming increased corp taxes and increased dividend taxes, the market will go down more.

[nezumi]

I perfectly agree: Advisors rarely fare better than the index. Naive investors however, like to delegate responsibility - and that is apparently worth the fee to them. So advisors will not die out as a species.

However, I don't agree than stocks are a good idea for investors, except for a handful.
It is a good idea to buy stocks at any time point picked at r a n d o m. The problem is, humans (naive investors and advisors) don't pick at random times, they are more likely to buy during booms and sell in busts when everybody else, driven by either greed or fear, does the same. And if it is not emotion, it is money availability. During boom times excess money is spendable on investments, during bust times you are likely not to have any money to buy stocks. I think once this is factor taken seriously into account, the statistics look much worse for stocks.

[DuganS1]

Most money that comes into the market is from 401Ks, pensions, and other retirement vehicles. That money is put into funds every few weeks (typically), and is used by the fund manager to buy stocks, bonds, or whatever the fund is designed to do. The worst investors are those that pull their retirement money out of the stock funds when the market is down, instead of accumulating more shares every few weeks at cheaper prices.

[nezumi]

Buying at a specified time with a fixed amount of money is very close to the random timing strategy. But why pay someone to do it for you?
I agree that a strategy like this is different. And pulling money out of that at times of distress (i.e. that is usually when assets prices are down) is, again, not rational, but really human and really really stupid.

[cylindar]

I would say that investing in the Stock markets is only one way to invest and that people should look into other options for investment. At present investment in stocks no matter what stock does not present a good ROI that should be there. Also, I would suggest that any drop of a pin such as a drought, wars going the wrong way, and any other number of global tension factors could really dump everyone in a very deep hole. Hold on to your money and look for the wisest of investments. Do you feel lucky today?