Mike Rivers' Blog Headline Animator

Friday, July 25, 2014

Comparison shopping

When you go shopping for a house, TV, clothes, or car, you understand that you need to shop around.

Shopping allows you to better understand the nature of the product you might buy. What are the options? What is the price range? How is the product sold? How is it supported after purchase?

If you don't do a good job of shopping around, you are very likely to pick an inferior product or pay too high a price. So, it pays to shop around.

The same can be said when it comes to looking for investing or financial advice: you need to do some comparison shopping. (In fact, I think that the expense and impact of good or bad financial advice far out-weighs the cost and benefit of a house, TV, clothes or car. But, then again, this is what I do for a living.)

But, many consumers don't comparison shop for investing advice. They pick the person they already know who does it, or a golfing buddy. Some people ask for referrals from friends, family or coworkers, but then don't find out who else is out there or what they have to offer. How do you know what you're getting is any good if you don't know what else is being sold and at what price? The worst way to pick such advice is to wait for someone to come to you--you know, the shark with his fin showing.

What types of things do you need to find out from a potential adviser? Start with their track record: how are they doing with their own money?

Would you want to work with a plumber who can't fix her own pipes, or a doctor that can't successfully diagnose patients? Then, why would you want to work with an financial adviser who hasn't succeeded financially themselves (or are on a clear path to doing so)?

It is shocking how few advisers follow their own advice. Most mutual fund managers don't put but a small amount of their own cash into the fund they manage. Many sellers of insurance and annuities buy the minimum required so they can say they buy the product they sell. A good adviser puts most of their money into the product or service they sell. If they say it is good for you, why wouldn't they be fully invested themselves?

Another thing to find out from an adviser is how they are paid. If they are paid a commission to sell a product, don't expect much support after the sale. If they pass you off to someone else after the sale, you just bought a service from a rainmaker--good luck with that. The best situation is when their pay is aligned with your interests in some way. If you don't understand how they are getting paid or they are evasive in answering your questions, be wary.

Another question to ask is how much a potential adviser charges? Be careful, because you may be comparing apples and oranges. A Porsche doesn't sell at the same price as a Yugo, so don't expect a good adviser to be lowest cost. Make sure you understand how much you would be paying relative to similar services. If the rate is above or below average, then assess whether it makes sense to pay more or less. Higher touch service is higher cost, so is higher performance service. Price is not a figure in a vacuum, it belongs in the context of the value you are getting.

Finding good financial advice is hard. There just aren't that many people out there who are good with their money. Also, the investing advice business is structured to sell products and services, not specifically to help clients, so investors are understandably wary.

To get good advice, you need to shop around. Find out what services are available at what price. Talk to many people in the field to get to the point you understand what you are buying and the quality of the person you are buying from.

As they say, if you don't know jewelry, know the jeweler. To get good investing advice, you don't need to know investing, but you do need to know your investing adviser.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

Friday, July 18, 2014

Show me your numbers

Most investors don't really know how they are doing.

One reason is that many investment advisers don't report their performance. Jason Zweig pointed this out in a Wall Street Journal article this past weekend.

Another reason is that most investors don't know what the numbers mean. Are the numbers reported before fees or after fees? Do the numbers include contributions and withdrawals, or are they time-weighted to remove that impact (investment advisers shouldn't get credit for your deposits)? Is performance compared against a relevant benchmark? Many advisers would prefer to keep their clients in the dark, otherwise such clients would know how poorly they are doing.

Even more investors don't really want to know how they are doing. It's kind of like deciding to step on the scale--or not--after the holidays. Do you really want to know how much weight you've put on?

But, not reporting, not understanding, and not looking won't change the underlying reality. Reaching your financial goals is too important to play ostrich.

Make sure your investment adviser reports their performance accurately. Such results should comply with industry standards, include fees, adjust for deposits/withdrawals, and be compared to a relevant benchmark. 

If you don't understand the numbers, ask questions. Evasive answers should raise red flags in you mind. Clear descriptions should give you comfort.

If you want peace of mind, you need to know where you are going and whether you are getting there. With investing, accurate reporting is not a nice-to-have, but a necessity.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

Friday, July 11, 2014

Past performance is not an indicator of future results

Every money manager must say that past performance is not an indicator of future results, but most investors ignore this warning.

In fact, most investors--individual and professionals alike--use past performance to choose money managers.

That's a big mistake.

S&P Dow Jones recently reported on why: investment performance is rarely persistent. Put differently, past performance really doesn't tell you much about future returns.

How bad are the numbers? Out of the 687 mutual funds that were in the top one-quarter in March 2012, only 3.8% were there again two years later (purely random results would have indicated 6.25% would have remained).  

Out of the 1,372 mutual funds that were in the top one-half in March 2012 , only 18.7% were there two years later (purely random results would have indicated 25% would have remained).

Just because a money manager beats the market in one period does not mean they will in the following period. In fact, it is much more likely they won't.

Over 5 years, the numbers are even more stark. Out of 715 mutual funds in the top one-quarter in March 2010, only 0.3% were there again four years later (purely random: 0.4%). 

Out of 1,431 mutual funds in the top-half of in March 2010, only 4.5% were there again four years later (purely random: 6.25%).

Does that mean that no one can beat the market? No. Does it mean it is very hard for someone to do so? Yes. It is even harder to tell the difference between those who can do it persistently and those who can't.

Investors who use past performance to chose money managers are taking a huge risk.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.