I have written about the many difficulties of achieving consistent good performance: from minding the myriad of intersecting forces in order to stay above the water, the skills needed to balance long-term investment principles with technical knowledge, to blocking out noises that only confuse investors. On top of all that, it also serves to see the big picture, particularly forces related to social and demographic shifts. There is a lot to take in – which would explain why so many of us delegate the task to other people.
Yet for all those financial advice we consume from both paid and free sources: advisors, newspaper columns, personal finance and investment magazines, business TV programs and water-cooler conversations, most small investors find themselves unprepared and worse yet, unprotected from the financial storm that swept through much of the world in the past half year. After coming across Jeffrey Goldberg’s recent article, I am more convinced than ever that it is next to impossible for a small investor to make it in the stock market.
The small fish gets Jiffy Lube advice
Most of us have assets less than, say, $10 million. And that’s about the threshold that determines whether one gets the attention of a top-flight money manager, or a print-out from a cookie-cutter computer program.
In the article, Goldberg highlights the pressure to provide conventional advice.
Advisers only recommend what’s conventionally palatable. They tend to say 60 percent stocks, 40 percent bonds, and they’re not likely to move away from that, no matter how extreme valuations are. They’re not likely to move away from it when the market is really high, or really low. A big part of the problem is that there isn’t a perfect answer to any of this. No one can tell you how to allocate your assets 100 percent of the time. The average investor is not getting Warren Buffett to look at his portfolio; he’s getting a printout from a computer model.
Knowing the average investors’ aversion to risk, but feeding on their hopes for ever-higher returns, an investment advisor cannot be blamed for holding up the mutual funds and stock market charts that always “trend” up and to the right. And not wanting to miss out the double digit returns from merely parking one’s money in an investment account, most investors hand over their assets and turn on their “buy and hold” mode.
Timing matters a lot
In fact, much of the personal finance field spews out more or less the same bland and conformist conventions. Some of the advice has proven to be sound and timeless, but many are much too general.
For example, if one marches into an investment advisor’s office today and ask for advice on dealing with a much lighter portfolio, one is most likely to be told to extend her “investment time horizon”. This obviously doesn’t work for someone ready to cash out of his 401K after a lifetime of work and savings, or parents counting on the market to pay for their children’s impending education. And the investment industry is hypocritical for attempting to dispense advice as though we are starting from zero, and not the minus fifty percent that many of us are finding ourselves in.
On that note, I think it’s good to stress that a singular commitment to the traditional buy-and-hold strategy, without taking into account the issue of market entry and exit timings, will get investors into trouble. The market moves cyclically, and in the long run, it usually moves up. Unless you’re in Japan, of course, where the market has sunk to 1983 levels. But in most cases, let’s suppose the rightward and upward trajectory holds.
But if and when someone is caught in the peak and trough of an economic cycle, where their financial surplus and obligations are in fact more fitting for something of the reverse, then a blind faith in the long-term wisdom of the market will either have you enter the market when it’s already overbought, or cash out at a time when the market is oversold. To mitigate such risks, financial planning needs to incorporate not only market movements, but whether volatility and riskiness of staying in the market is commensurate with one’s changing financial needs.
Customer of many, friend of none
A small investor doesn’t have a lot of friends. At least not many that actually have their interests at heart. The wealthy are taken care of by “wealth management” businesses that “gather assets from wealthy people and then place those assets with a whole bunch of managers who will manage different pieces of it in diversified styles so you don’t lose it all at once.”
The everyday investors must sift through the many personal finance columns, magazines and questionable business television programs for some sensible advice. And those media outlets are only too happy to occupy the vacuum left by institutional and hedge fund managers.
Run-of-the-mill advice are for the uninitiated and get pretty old fairly soon. But once investors decide to become more actively involved in self-education, he is bound get confused very soon. Contradictory advice abound: gold or dollar, inflation or deflation, recovery or bear market rally?
The various models and theories used to price assets, measure progress and project the future are just that, models and theories. There are people behind the scene performing stress tests, incorporating more variables, performing tweaks and adjustments all the time. The interconnected economies complicate matters, political interests and politically dominant corporations complicate matters, unexpected behavioural shifts complicate matters, and sociological and demographic shifts complicate matters. The market is influenced by so many unknowns, even economists can best provide outlook and analysis based on what they know.
Curiously enough, economics is also one area of academia that opened up its laboratory to the masses. Very few of us will ever get to witness a medical procedure, or participate in a chemistry research project. But almost all of us are involved in an ongoing social and economic experiment that is spearheaded by the stock market. And through either voluntary or induced participation, we are required to live with a level of uncertainty not commonly known to some parts of the world.
Perhaps some of us will elect to step out and stay out of the market after this wild ride comes to an end. Because finding someone competent enough to advice you is very hard when you are a small investor. And finding advice on a piece-meal basis is even more dangerous, because to be selectively informed is worse than being uninformed. In Bill Gross’ opinion, “The system is rigged. It’s difficult for the average investor to even conceptualized what we’re talking about.” But if you insist on finding good returns from the market, then you should at least “find someone who isn’t overpromising or overcharging.”
picture source: ~Cypisek666
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