by Dr Invest
Perspective is often an unusual thing. Perspective can give importance to things that are really unimportant or lull some one to devalue things that are really important.
The market usually rolls by news, fad, or popularity. It is the "crowd mentality" that rules in the market place. Think about it for a moment, billions are spent each year to get you to change your tastes and buy some new product. It doesn't matter that an ANDROID product performs equally as good and perhaps in someways is superior to an APPLE product; but when the announcement of a new APPLE product comes, every one must have one. (Note: Apple vigorously defended their I-Phone by suing Samsung for their Galaxy-S. Why? What was Apple defending? If the Apple product was truly superior, would the Samsung Galaxy-S really matter?)
I think you get the drift here. Even in the STOCK MARKET, companies build their reputations, market their products, and build a demand through advertising. "There is no guarantee of returns" is proudly pronounced with each advertisement, yet the suggestion is that "if you buy our product" you are going to get superior returns. A closer look at the actual returns is surprisingly lower than what you had imagined you were getting in your mind.
Ten years ago, an 8% draw down was acceptable during retirement without affecting your nest egg; today, most financial advisers are recommending that 4% is the new target of draw down before affecting your core investment. REMEMBER the word, PERSPECTIVE!
When you hear: "The market rose higher in the past three months, than it has since 1984... blah... blah." This is dribble and the only basis of fact is that at some time in history the market climbed more. Let's looks at some charts, so we can get our own perspective.
This is a 10 year chart. If we divide the total percentage by 10, we get the average annual return over the past 10 years for the S&P and the DOW Jones.
- S&P - 2.27% is the annual average return. Deduct your fees to an investment adviser and you will have .27%. Deduct the CPI... the rate of inflation and your investment is underwater.
- DOW - 2.45% is the annual average return. Deduct your fees to an investment adviser and you will have .45%. Deduct the CPI... the rate of inflation and your investment is underwater.
We are dividing the percentage return by 5 to get the average annual return over the past 5 years.
- S&P - (-.17)% is the annual NEGATIVE average return. Deduct your fees to an investment adviser and you will owe (-2.17)%. Deduct the CPI... the rate of inflation and your investment is well underwater.
- DOW - 1.81% is the annual average return. Deduct your fees to an investment adviser and you will owe .18%. Deduct the CPI... the rate of inflation and your investment is well underwater.
You don't have to possess a doctorate to see the challenge. When you consider that studies show that investment portfolios underperform the DOW index, often as much as 20%, it is no wonder that so many are reluctant to risk their money in the Stock Market.
Like never before, Wall Street is trying to repaint themselves as reliable, honorable, and worthy of managing your life savings.
In 2009, I invested money with a financial adviser. After implying that he could beat the 14% average annual return that I had gained in my portfolio over the years, I let him manage some of my money. Later, I began to see an underperformance in my investments. I expressed my concerns, but felt brushed aside as inexperienced and a novice. Then I notice an unusual behavior that I later learned is used by many financial advisers. He moved my account from Scott Trade to TD Ameritrade and then to a third broker.
I was a novice! Each time the account was moved, the stocks were recorded at the price the stocks were valued on the day of their transfer. So, for example, EXXON was originally purchased at $90 and declined to $60 at a loss of $30. EXXON is transferred to a new brokerage and recorded at a value of $60, but 30 days later is worth $65. Your financial adviser provides you with a statement of your account that shows an increase in the value of EXXON of $5 per share. You feel exhilaration of getting a profit, when your total portfolio declined. And yes, this is a common practice in the industry.
This was like a reset button, all losses were erased and the new brokerage began showing profits for the transferred stocks until the market turned down again and there were losses. Then there was another transfer to another brokerage. Walla! Problem fixed!
When I deducted the money I had invested into the portfolio from the total portfolio balance, I found that my original portfolio was declining. For example: My original portfolio investment was $10,000; I had added $5,000, totaling $15,000. So by subtracting $5,000, my portfolio should be at least $10,000; instead, the base portfolio was $8,500. Even with deductions for portfolio management, you couldn't loose 20% of the value of your portfolio and have the financial statement from the brokerage showing you were gaining 9%.
This is not a complaint, it is an observation. Smoke, mirrors, and redirection is commonly used in the financial management business. Since it happened to me, I have had others tell me the same happened to them. Confusing accounting, multiple accounts, and some times many different investment instruments leave the investor bewildered. The very thing some financial advisers intend.
Conclusion
The "crowd mentality" pushes the prices of stocks higher and higher. Though traders know that they shouldn't be in the market, the percieved opportunity to make a profit is just too tempting. The market can't continue to climb forever, eventhough the financial institutions loudly admonish investors that now is the time for the buy of a century.
(Note: The above information is for entertainment purposes only and not to be used as investment advice.)
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