Valuation-Informed Indexing #76: The “Risks” of Deviations from Buy-and-Hold Are Felt by Financial Planners, Not Investors

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<i>Valuation-Informed Indexing</i> #76: The “Risks” of Deviations from Buy-and-Hold Are Felt by Financial Planners, Not Investors

by Rob Bennett

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Deviate from Buy-and-Hold principles and you will increase risk. So the financial planning class repeatedly warns us.

Maryland Planner Michael Kitces recently worked up the courage to ask a provocative question: just who is being put at risk when investors elect to take price into consideration before putting money down on the table? It’s hard to imagine how investors could be increasing their own risk by acting rationally. So where does this extra risk come in?

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It is the financial planners who are put at risk if investors learn how to invest successfully! They don’t put it that way because no one would be taken in by the nonsense if they did. But that’s the reality. Letting investors know the realities of stock investing makes financial planning a far more risky business than it is in a world in which the customers are being led by the hand by the “expert.”

This is a theme that I would like to see explored in thousands of articles posted at hundreds of different web sites. It’s pretty much the entire stock investing game today.

In a day when indexes are available to us, there is no need for stock investing to be complicated or risky. Investors who buy indexes at reasonable prices always achieve good long-term results. Why don’t we all just do that? What argument is there for playing it any other way?

The trouble is that most middle-class investors don’t have enough interest in the subject of investing to learn the basics. So they turn to experts for advice on what to do. But the people widely referred to as “experts” possess their primary expertise in sales. They know how to promote stocks. They have little insight on how to know when stocks are worth buying and even less interest in sharing what they do know with those who come to them for advice.

The investing experts are not our friends. That’s what it comes to. They are smart people and they are nice people. But no sane person would tell someone looking to buy a used car to put all his trust in the salesman who greets him at the door with a smile. How different is that from telling a middle-class investor to stake his retirement on cutesy marketing slogans arguing that stocks are always best for the long run or that there is no need to beat the market or that timing might not work this time?

To bring the economic crisis to an end and to stop future economic crises from developing, we need to change the culture of stock investing. We need to apply the common sense we apply in every other field of human endeavor.

Should people talk to used-car salesmen? Why not? The used-car salesmen and the customer often share common desires. The customer wants a good car and the salesman wants the customer to get a good car (the customer is far more likely to return to his establishment if he enjoys the car he purchases). We don’t tell people to avoid used-car salesmen or to hate used-car salesmen. We tell people to employ skepticism in their dealings with used-car salesmen.

That’s what we need to do to provide legitimate help to people seeking to invest their retirement money effectively.

Stock selling is a trade, like any other trade. There are certain skills that one must come to possess to be a success in this trade. And there are certain ethical pitfalls that one must avoid if one is to feel good about oneself at the end of the day. We don’t do our friends in the stock-selling industry any favors when we suggest that this field is different in some magical, mystical way, that this is the one field in which the desire to turn a quick book doesn’t influence those charged with pushing product out the door.

I’ve spoken with many stock selling salesmen over the past nine years. My strong sense is that many would like to see heightened standards of integrity applied in the industry. Many are very much aware of the 30 years of research showing that valuations matter and would love the opportunity to apply their intellects developing strategies to help their clients make use of that insight to their long-term financial good fortune.

But they don’t like to stick out. No one financial planner can give good advice today without being seen to be making all the planners pushing Buy-and-Hold strategies look bad.

The answer is not to continue ducking the question. The longer the crisis continues, the worse everyone feels about bringing these matters out into the open.

Kitces is taking things in the right direction. Of course financial planners take sales factors into consideration when offering “expert” advice to their clients. We want to make it as hard as possible for them to do that. We make it harder by writing articles of the sort that Kitces posted at his blog, articles that call the financial planners out on their nonsense.

The better the advice we see coming from financial planners, the better off we all are. And we all have a role in improving the quality of the advice that planners give to their clients. When you hear financial planners talking nonsense, call them on it! Down the road, they will thank you for making them better at what they do.

Rob Bennett offers life planning tips at his web site. His bio is here.

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<i>Valuation-Informed Indexing</i> #76: The "Risks" of Deviations from Buy-and-Hold Are Felt by Financial Planners, Not Investors

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Rob Bennett’s A Rich Life blog aims to put the “personal” back into “personal finance” - he focuses on the role played by emotion in saving and investing decisions. Rob developed the Passion Saving approach to money management; Passion Savers save not to finance their old-age retirements but to enjoy more freedom and opportunity in their 20s, 30s, 40s, and 50s - because they pursue saving goals over which they feel a more intense personal concern, they are more motivated to save effectively. He also developed the Valuation-Informed Indexing investing strategy, a strategy that combines the most powerful insights of Vanguard Founder John Bogle and Yale Professsor Robert Shiller in a simple approach offering higher returns at greatly diminished risk. Tom Gardner, co-founder of the Motley Fool web site, said of Rob’s work: “The elegant simplicty of his ideas warms the heart and startles the brain.”
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2 COMMENTS

  1. Perhaps it reflects diversified society – some people would happy if you teach them basic family bidgeting (and it is a good start), but many others going a step further – trying to achieve financial independence. Preferably before once is reach official retirement age.

    I do not think it is only risk – it is combination of risk versus reward. I have recently analyzed all “Big Oil” companies and when you take a hard look – you are getting about 1 to 0% above official inflation level, as far as dividends go.

    So because of the abundance of money in the stock market – compensation for the risk is not nearly as high as it used to be.

    The second part of it – compensation for financial advisers. Most people go to them once, when they are ready to invest $100-$50,000 and their exect poses none of the knowledge and do financial adviser all the thinking. It is possible, but how much are you will to pay?

    It is all about preparation and being interested yourself in what you are doing. The only way to heighten the standard is by competition and demand – customers must develop interest and some underpinning knowledge about the investment products.

    This will improve the investment climate as well. It is your money after all – you have ultimate responsibility. No one else.

  2. Now in my 40’s, I was actually considering going back to school to become a financial / investment advisor.  Then I realized, it’d be highly probable that I wouldn’t make any money giving “honest” advice.  When 99% of financial advisors lie, it would seem the other 1% would be viewed as the “dishonest” ones…  either that or ignorant.  Combine that with the fact that I didn’t want to make my living selling people a bunch of crap investments just to get the commissions…   I gave up on the idea.  No sense going back to school, going back into debt via school loans, only to have potential customers shy away because they’re so used to being lied to that the truth is not believable.   What a sad world we live in.

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