Ep 131: Financial Perspective: Advisers Can Give Bad Advice
In my last podcast, I alluded to the fact that I would be talking about money in an upcoming podcast. I mentioned that investment advisers (liar for hire) always tell their clients that you need to have and keep your money in the market (stock) over your entire life, because you’ll average about 7% a year, and that’s how wealth is built.
There’s a little problem with that line of reasoning, though…for the past ten years, the S&P 500 SPDR (etf) is averaging a LOSS of over 1 % annually. That’s a far cry from what your investment “promises” you. Now they don’t really promise, they just “assume” and let you “assume” that 7% is written in stone and don’t worry about it.
Worse, experts are coming forward predicting virtually no growth in the American market for the foreseeable future. Is this the American dream?
Now, full disclosure here: I still have 15% of my paycheck set aside and put in the market tax deferred. BUT, I see that as giant savings account with a penalty for early withdrawal. I took out a “big” chunk to help buy our vacation/bugout house. I’m not apologizing for doing so. When factoring in how the market tanked after I withdrew the money, I was really ahead (although I was actually making money in the down market because I was buying gold/commodity funds in my 403b)
So what do I do?
- First, keep your head. Assume the end of the world isn’t coming tomorrow and have a plan on what to do with your money.
- Second, go with your plan. Would you feel better by listening to other’s advice or your own?
- Third, diversify. I don’t see holding some gold, silver, stocks, bonds, land, houses, IRAs, brokerage accounts, collectibles, etc as a bad idea unless you are only banking on ONE of them. Have a little bit of everything.
- Fourth, think with grandpa’s and grandma’s brain. How were things done in the old day? Well, I’ll tell you: You paid cash, lived within your means, and didn’t take stupidly expensive vacations. You didn’t spend your life in front of the tv or x-box and you worked all of the time. Follow their lead and you’ll be fine
- Next, stop trying to impress your neighbors/strangers. Live modestly and have plenty in reserve.
- Oh, and one last thing…PREP!!! Store food, grow a garden, plant fruit trees, collect water, own your home and put sweat equity into it. Do all of this and more and you’ll have little time for worrying because from all of the work you’ll be hurrying.
FYI–I have a lot more to say about finance and investing. Stay tuned for more on this subject soon.
You Wasted the Past 10 Years of Your Life
By Nate Weisshaar | More Articles
June 16, 2010 | Comments (2)
If you think the stock market is the road to a comfortable early retirement, you’re wrong. You may have thought about cashing in on the long-term average annual returns of 7% (postinflation) you heard you could get from investing in stocks, but I’m here to tell you to think again.
In the past decade, the SPDR S&P 500 ETF (NYSE: SPY ) , an exchange-traded fund (ETF) designed to track the broad U.S. stock market, returned an amazing -1.4% per year. That’s right, negative, as in less than zero. Including dividends. That’s a long way from 7%.
It’s a small, small world
Going global didn’t help much, as the iShares MSCI EAFE Index Fund (NYSE: EFA ) , a proxy for the world’s developed markets, has provided a total annual return of 3.5% since it was started nearly nine years ago.
In fact, investors had to rely on emerging markets, which provided annual returns of 8.1% from 2000 to 2010, in order to get returns in line with the generally accepted long-term average return from stock markets.
It could be worse
However, according to Jeremy Grantham, co-founder of the asset management firm GMO, even this limited outperformance is coming to an end. He and his team of analysts are expecting emerging-market stocks to return just 4.7% per year after factoring in inflation over the next seven years. U.S. large-cap stocks are expected to return a measly 0.3% after inflation, and U.S. small-cap stocks are expected to lose almost 2% per year over that period.
Now this is only one man’s (and his associates’) view, but when Grantham speaks, people in the financial world listen, because over the years he has proven incredibly prescient when it comes to long-term investment returns, accurately calling the annual rates of return on 11 asset classes between 2000 and 2010.
Change is in the wind
If Grantham is right, we could be in for what many commentators are calling the new normal, meaning that the broad-based market joy we experienced 1983 to 2000 will be reserved for history books. Instead, we could be in for several years of volatile markets that generally move sideways.
In this type of market, index funds and ETFs won’t do your portfolios any favors. Buy and hold just won’t do it. Investors will need to be much more discerning and proactive if they expect to see the types of returns that will lead to an early retirement.
Investors who know how to pick the stars from the wannabes will be able to take advantage of the volatility that is characteristic of this new type of market.
That means finding high-quality companies with secure dividends, companies like Johnson & Johnson (NYSE: JNJ ) and PepsiCo (NYSE: PEP ) , both of which have strong brands and stable cash flows to support their 3%-plus dividend yields.
Megacap blue chips like these are well-followed by both Wall Street and Main Street, so we wouldn’t normally expect them to blow the doors off the market, but things aren’t normal. Times of market volatility provide opportunities to snatch up these stalwarts at discount prices, and the safe dividend provides a source of income while you weather uncertain times.
Looking in the dumps
And while we may not see markets move up much over the next several years, there will be movement within markets by stocks that are currently being shunned for whatever reason.
The tragic oil spill in the Gulf of Mexico has rightfully pounded BP’s stock, but it has also taken down less deserving players like oil field services leader Schlumberger Limited (NYSE: SLB ) and seismic mapping giant CGG Veritas (NYSE: CGV ) , two companies which dominate their respective positions in the energy exploration and production industry.
Both of these companies have the strong reputation and global operating footprint to sidestep the Gulf spill. The collateral damage from BP’s mistake is providing patient investors with the ability to look beyond the headlines and the opportunity to pick ‘em when they’re down.
Don’t go it alone
That’s what Jeff Fisher and the Motley Fool Pro team do — troll the depths of market sentiment to find investments that perform even in a volatile market. They even take it one step further, using tools like options to pick up investments at bargain prices or produce income even as stock price stagnates.
If you’re interested in preventing your investment portfolio from languishing for another decade, enter your email address in the box below to learn more about how Motley Fool Pro can help. You’ll even get a free report with five strategies for growing your portfolio in a volatile, range-bound market
Daria and I both started our careers as stock brokers. But times have changed since I took the New York Stock Exchange exam in 1971. There are many more products for brokers/financial planners (we call them both “brokers” in this article) to sell and much more pressure to sell them — lots of them.
With a combined 40 years in the financial services business, Daria and I have seen just about all the tricks of the trade (excuse the pun!) and we’re about to reveal them. In addition to our own experience, we talked to a number of brokers with the promise of anonymity. Believe me, you won’t find this information anywhere else! Here are investment pitches that should trigger your suspicion:From The Dolans
We are not fans of most “in-house” products for three reasons: 1.) a broker may get a higher percentage of the commission for selling you one of these products; 2.) many of these funds underperform similar “non-brokerage” funds; and 3.) if you decide to transfer your account to another brokerage firm Â… too bad Â… the new firm generally won’t accept a competitor’s “in-house” funds. You’ll be forced to either leave the mutual fund(s) at a firm you no longer want to do business with, or sell the funds right then and there. Two bad alternatives!
Straight Talk Tip: Your investment objectives may best be served by being in more than one family of funds. But, we just want you to realize that you can save 1%, 2% or more by staying in one family of funds, if appropriate for your portfolio. Something called “rights of accumulation” allows a commission break when you invest large amounts in one fund family. Has your broker ever mentioned this to you? (Let us guess!)
Your broker breathlessly calls with an exciting stock tip that you can buy “without a commission.” A golden opportunity? Unlikely.
You’re probably being pitched a security owned by the brokerage firm. Does that mean it’s a bad stock? Not automatically… but it does mean the broker is, likely, receiving a “commission credit” to sell it to you. Plus, the firm may mark up the price to make up for the higher commission they pay the broker. Some deal! If you’re interested in the “no commission” investment, call another firm or two and compare the total costs of the transaction.
We’ve warned you about end-of-the-month pitches by car salesmen Â… beware the same from brokers. Some unscrupulous brokers will “churn and burn” their accounts toward the end of the month (especially “discretionary” accounts where a client has authorized the broker to buy and sell at his discretion Â… one reason we don’t ever want you to grant discretionary power to your broker!)
Every month many major firms total a broker’s commission for the previous 12 months to determine a broker’s “payout” (his share of the commissions) for the following month. A low level of commissions Ã‚Â– generally, a low “payout” (level of transaction commissions paid) If you see a pattern of “end of the month” recommendations from your broker, it may be time to switch brokers.
Your broker suggests that you buy stocks on margin, i.e., by borrowing up to 50% of the purchase price. You can buy twice as many securities as you have money available because your kindly brokerage firm lends you the money and charges you interest. This is a major profit center for most brokerage firms and a very risky way to invest … DON’T DO IT!
As in “bonus” annuities that promise an above-average interest rate. Sounds good? Not so fast. As usual, there’s usually a hitch. Check the fine print and you’ll probably find that the initial rate is much lower with an additional “bonus” rate for the first year only.
Your broker is changing firms
Why? Is it because the resources of the new firm will help him/her better service your account or is it because he’s receiving a large, up-front cash bonus for bringing his “book” of business (including you) to the new firm. Be especially wary of the hard sell during those initial months after his move. Firms often offer brokers a “recruiting” package that includes a higher payout on trades made in the first three to six months with the new firm. (Do you feel a twinge of distrust here?)
Ask your broker flat out, “Are you trying to qualify for a sales contest prize?” If the answer is yes, make him prove to you in writing that the investment matches your objectives. (If he lies, you can hold it against him later, if necessary.)
Well, I guess by now we’ve guaranteed ourselves a lashing next time we’re on the floor of the New York Stock ExchangeÂ…just kidding. Those brokers/financial planners who are truly committed to helping you – and there are many of them out there – won’t mind that we shared this information with you. Honest brokers/financial planners want you to be an informed customer.