On Wall Street, business as usual thrives on investor ignorance. It is not in Wall Street’s interest to have more astute clients.
Here are 10 ways to see how you’ve been suckered into becoming a Wall Street chump.
- You’re a chump if you believe that there is an investment that yields high returns with little or no risk. The astonishing amount of money lost in financial scams is often the result of suckers believing promises of unrealistically high performance in investments that they don’t understand.
- You’re a chump if you’ve been fooled into believing that your financial success depends upon finding a smart money manager or guru who knows what lies ahead in the capital markets. Don’t be suckered into mistaking predictions for insight. Wall Street’s fortunetellers have exchanged their crystal balls for charts and graphs and call themselves economic analysts. It’s easy for them to proclaim certainty in an uncertain world when they have no skin in the game. The future is unpredictable. Anyone who makes predictions is a fool and anyone who listens to them is a sucker.
- You’re a chump if you don’t understand that Wall Street gets rich at your expense. In 1940, Fred Schwed wrote the book “Where are the Customer’s Yachts?” This investment classic captures the essence of how Wall Street transfers dollars from customers’ pockets to their own. It should be required reading for all investors.
- You’re a chump if you’re searching for mutual fund managers who consistently outperform their peers. S&P has just released its semiannual Persistence Scorecard which tracked the subsequent performance of top-half mutual funds over the three and five year periods ending March 31. The number of funds that maintained top half performance over three and five consecutive 12-month periods is below what we would expect from random chance alone. The obligatory disclaimer “past performance is no guarantee of future results” appears in every mutual fund advertisement, just below the chart that boasts about the fund’s past performance. Past performance can be used to compare the relative risk between two different investments but don’t be suckered into believing that you can buy yesterday’s performance.
- You’re a chump if you think that “I want the highest rate of return possible” is a legitimate financial goal. “I want to retire at 65 at my current standard of living, inflation adjusted for a 25 year retirement” is a legitimate goal because it has a calculable dollar value and a target date.
- Only a sucker believes that active managers add value over the long term. According to S&P, 75% of large-cap domestic stock mutual funds, 90% of midcap funds and 83% of small-cap funds under performed their benchmark S&P index for the five years ending Dec. 31, 2012. Rather than adding value, most managers subtracted value. By owning a portfolio of tax efficient, low turnover, low cost index funds you’ll receive 99.8% of the returns of the stock and bond markets and remove the fruitless task of manager chasing from your to-do list.
- You’re a chump if you believe that you can be a successful stock picker. It is virtually impossible for any investor to identify undervalued stocks, no matter what the E-Trade baby says. Owning individual stocks adds unnecessary individual company risk to a portfolio. You’re a sucker if you believe that your financial adviser can do what most professional money managers cannot do — find stocks that will outperform the market.
- You’re a chump if you use the words investment and short-term gain in the same sentence. Wall Street’s mouthpieces offer endless stock recommendations and short-term market outlooks. Having a comprehensive and comprehensible investment strategy, one that is based on academic research and focused on the long-term is more important than anyone’s investment outlook.
- You’re a chump if you accept specific, personal financial advice from someone who doesn’t know your financial goals, risk tolerance, insurance needs, employee benefits or tax bracket. An impersonal relationship with an adviser who creates a portfolio containing a hodgepodge of mutual funds and investment products isn’t financial planning –- it is retailing.
- Wall Street is about to give you a new opportunity to become a chump. The same week that Bloomberg Businessweek had a cover story exposing hedge funds as one of the most over promising and under delivering investments of recent times, the SEC eliminated its long-standing ban on hedge fund advertising. Soon, you’ll be offered the opportunity to lose money hand over fist just like the super-rich. Forewarned is forearmed.
There will always be enough suckers and chumps to keep Wall Street rolling in dough. Make sure that you’re not among them.
[by George Sisti, writing for MARKETWATCH]
As always, posted for your edification and enlightenment by
NORM ‘n’ AL, Minneapolis