One of my investment professors in college was a former analyst at a Wall St. brokerage firm. He was actually one of my favorite professors because of his depth of real world experience. His stories were fascinating to our class of students eager to learn about the real world of business. With his street-honed experience he bestowed upon us a pearl of wisdom that I will never, ever forget:
"When someone is trying to sell you something, ask yourself 'what's in it for them?'"
He repeated this quote several times during the year, each time with a wink as if to underscore the shroud of secrecy over the water-cooler discussons within sales departments of brokerage firms. Over the years I've learned that this principle applies not just to investing, but to pretty much everything in life. But 25 years later, it applies to investing more than it did back then.
This is one of the primary reasons that we're advocates and users of a low-cost, transparent investment strategy for our clients. Why? For several reasons: 1) it keeps investment costs down resulting in more money in our clients' pockets, and 2) it's transparent and easy to understand- there is no smoke and mirrors. We have complained that too many investment products that have come to market have complex strategies and alluring stories, but they fail in two areas: 1) they haven't proven the strategy works in the real world and 2) their fund expenses are very high.
I read an article today from Morningstar, the premier mutual fund ratings company, supporting our views. Here are some quotes from Don Phillips, managing director:
"Far too often, fund innovations increase complexity, drive up costs, and tempt investors to take on added risk at the market peaks or to retreat to apparent safety at market lows."
"Too many fund companies exploit investors' fear and greed. A history of fund launches or fund advertising presents a painfully accurate contrarian indicator of what savvy investors should do with their money"
The bloom is coming off the rose for many of these complex and expensive investments. Hedge funds, once attractive to many people because of their expected high returns, sexy strategies (though unproven and highly risky), and supposed low-risk have lost their luster because the markets showed that many of their investment philosophies were not infallible once stress-tested by reality. Structured investment products, all the rage just a couple years ago, are barely even mentioned anymore.
But even salespeople of traditional investment products are now exploiting the fear of investors after last year's stock market performance. Annuities salespeople are in full force, extolling the safety of annuities, usually without fully explaining the full costs involved, especially estate taxes. Unfortunately for investors, locking in a fixed annuity at today's low interest rates will be a disaster when inflation returns in a healthy economy. Remember the heydays of the internet boom? What types of mutual funds were heavily marketed? Tech funds. THe past few years also saw mutual funds investing in green technologies and socially responsible investing. As investors' moods change, investment products will follow.
What this teaches us is that the more things change, the more they stay the same. Be wary of the hot new investment product or strategy. Stick to a proven investment strategy. If anyone is trying to sell you a hot new investment product, make sure you understand all of the risks and look at the cost of the investment. And above all, ask yourself "what's in it for them?"