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.
Answer From Larry Swedroe
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.
- First, no one should own any individual stocks as that has more to do with speculating than investing because it involves taking what economists call unsystematic risk — risks that can be diversified away and thus you do not get rewarded for taking. Solution, build a globally diversified portfolio of passively managed funds like index funds and then stay the course, only rebalancing and tax loss managing. Several of my books show you how to do that.
- Second, my book on Alternative Investments shows the evidence on private equity and the results are not good. In aggregate, it is the purveyors that make the big returns, not the investors. And again it involves taking unsystematic risks.
- Third, your portfolio did not have sufficient diversification. And perhaps more importantly it may not have had even the right equity to fixed income allocation. My book The Only Guide to a Winning Investment Strategy You’ll Ever Need will help you understand the right way to invest and will also help you to develop your own Investment Policy Statement. It also explains why one should NEVER work with a commissioned investment advisor and also never work with an advisory who does not provide what is called a fiduciary standard of care. Both the “Winning Investment Strategy” and the Wise Investing books have sections on how to choose an advisor.
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.
- Mr. Swedroe’s opinions and comments expressed are his own, and may not accurately reflect those of the firm, nor Moolanomy and its owner.
- Not all questions will be answered
- By submitting a question, you grant us the right to publish your question.
- The answer is given based on the information provided in your question. Please seek professional assistance for more personalized advice.
This article was featured in the Carnival of Investing Strategies at The Penny Daily.
Larry Swedroe is a principal and director of research at Buckingham Asset Management, LLC, an SEC Registered Investment Advisor firm in St. Louis, Missouri. He is also principal of BAM Advisor Services, LLC, a service provider to investment advisors across the country, most of whom are affiliated with CPA firms. However, his opinions and comments expressed within this column are his own, and may not accurately reflect those of Buckingham Asset Management or BAM Advisor Services.
Before joining Buckingham in 1996, Larry served as senior vice president and regional treasurer at Citicorp and vice chairman of Prudential Home Mortgage. Larry is author of The Only Guide to a Winning Investment Strategy You’ll Ever Need (updated and re-released in 2005), as well as six other books. Most recently, he authored The Only Guide to Alternative Investments You’ll Ever Need (2008).
Larry has started his own blog called Wise Investing at CBS Money Watch. Please check it out!