As investors, we need to be concerned with the manner in which we turn our monies over to financial advisors to invest for us. Too many advisors simply pile your money into funds, which in many cases, come with high front end load fees that pay the broker a handsome commission. These advisors have little more in mind than to collect those commissions. In 2010 new laws were introduced to stop financial advisors from large front end loads that did not represent the best interests of clients however, powerful Wall Street Lobbyists made sure these laws were not passed. Obama now is leading a ‘paired down’ version of the same laws that were introduced in 2010 and this will take a few years to pass and will meet with much opposition.
This is truly unfortunate and why it is so critical to educate yourself about the workings of the economy and how to leverage that knowledge.
Too many investors are under the misconception that their brokers are doing well for them, when in fact, when you run the numbers it becomes clear that this is not the case.
Think about this: If a managed portfolio is up only 12 percent a year for the last five years, then that portfolio has underperformed the markets by a wide margin, because the S&P 500 has done an internal rate of return of over 20 percent over the last five years.
That is why you are doing yourself a huge favor by spending time reading this newsletter and educating yourself about the investment options you have that your financial advisor is not likely to tell you about.
Let me explain why this is such a sad truth.
I reside in Las Vegas and recently I decided to open a brokerage account, so I could run some of my ideas about specific stocks past someone else before I implemented them. I mean, I value feedback – as long as it is trustworthy.
I started calling all the major brokerage firms, but I was unable to find one single broker I felt I could work with. Every one of them told me that they don’t buy individual stocks and only invest in funds. All these brokers wanted to put me into managed funds, which I am convinced, is a long, slow road to the poor house.
They even went on to explain their concept of diversification and why it was such a good thing. I was not buying it.
If there is one thing I know for sure is that diversification is a misused and misunderstood concept used by financial advisors to direct their clients into managed funds, which by design benefit the advisor much more than they benefit you, the investor.
I’m not making this up. Statistics show that 92 percent of managed funds underperformed the stock market index over the last three years.
Let me elaborate further with an example.
If you invested $10,000 in the S&P 500, (which represents 500 of America’s largest public companies), over a 50-year span of time and that investment performed at the market average, then you would end up with $1,170,000. Certainly not a small amount and probably enough for most people to retire.
However, when you subtract the 2 percent annual management fee over those 50 years – money that is no longer available to invest on your behalf – then you are left with just $470,000. In this example, you lose over 60 percent of your potential gains by paying out that 2 percent annual fee to your financial manager.
As an independent investor, you need to realize that the professional financial service industry is in business to make money for itself and not you. That is the reason you need to take personal responsibility for your own investing.
- You need to become informed on what’s happening in the economy.
- You need to learn what your options are beyond those pathetic managed funds.
- You need to learn how to do research and know what you are looking for.
- You need to gain confidence and learn how to take control of your investment choices.
- You need a strategy so you take the best actions given your particular situation.