In this Ask The Expert With Larry Swedroe article, the reader (Larry) lost a lot of money in the stock market. He detailed his plight and complained about his full service brokerage firm. It’s 2009 and he only have half of what he did a few months ago. What should he do? Here’s the question from Larry:
In June of 2008 my stock portfolio was worth around $800,000. Now it is around $400,000. I am freaking out. About $300,000 was evenly divided in Exxon and Chevron, which over the last 20 years have been a very good choice. The balance is with Merrill Lynch in their “Private Client” group. They had me in a fairly aggressive private fund that has lost around 44%. On top of the losses I will see capital gains in the fund and a stiff commission to Merrill.
I don’t expect you to say anything about them, but I will say they should have called me into their office with advice to rebalance my exposure in equities. Instead I got no advice. In my opinion, it is advice I pay for via a full commission broker service. What should I do? I feel like rolling everything from Merrill into a cash account until late ’09. Suggestions are greatly appreciated. Thanks.
Larry, sorry to hear about your situation, it is an all-too-common one. And in my opinion it happens because our education system has failed the public. Despite the fact that money is the third most important thing in our lives (after family and health), unless you get an MBA in finance it is likely you have never taken a single course in capital markets theory (and by the way, neither have most stock brokers whose investment education is mostly SALES training). And because Americans seem to be very lazy (they would rather watch some reality TV show than spend time reading books like my “Only Guides” series (equities, bonds and alternative investments). So that lack of education leaves them like sheep ready to be sheared by the wolves of Wall Street. It is usually the investment bankers that end up with the trips to Hawaii (financed by the fees paid by investors), not the investors. So my best advice is to get an education. You might start with my book Wise Investing Made Simple. It is a collection of 27 short stories that will give you an “MBA” in investing pretty quickly. At least you will understand the way the markets actually work and it will also provide you with the winning strategy.
In the meantime here are a few things you got wrong in my view.
What amazes me is why anyone would trust their investments to a Wall Street firm. Haven’t they demonstrated that they cannot manage their own risks, let alone yours? And they really don’t have your interests at heart, they have theirs. That is why so few are willing to provide a fiduciary standard of care — because they would be required to provide advice that was in your best interests.
Here is a good question for you. In providing advice did the firm ever have a “discovery meeting” with you to find out your goals and ability, willingness and need to take risk? Did they explain fully the risks involved in investing in individual stocks and private funds? Did they show you the academic evidence on funds that try to beat the market (it is horrendous)? Did they write an investment plan for you? If none of the above was done then how could they give proper advice tailored to your situation? If there was no plan, how could they rebalance to targets that did not exist? My bet is they did not do even one of these things. The reason is that they are SALES people, not investment advisors.
Bottom line is the best recommendation I can make for you is to “invest” a bit of time and money in your own education. Reading books like the ones I have written will be the best investment of time and money you will ever make. Other authors I would recommend are John Bogle and William Bernstein. Good luck.
This article was featured in the Carnival of Investing Strategies at The Penny Daily.