Wall Street tells us that the ways to build wealth are to:
Unfortunately, each of these things has a less than 50% probability of increasing your returns.
But I’m starting to think that an even bigger problem than the ineffectiveness of those strategies is the fact that the focus on them is a distraction from the few things that really do matter when developing an investment strategy.
For example…
I’ve met several investors who have no difficulty spouting off several folk-wisdom tidbits about how to pick stocks, but who aren’t familiar with the concept of asset allocation.
I’ve met several investors who can tell you the 10-year return for the fund they just switched their 401k contributions to, but who never bothered to check the fund’s expenses.
I’ve met several investors who can list a whole host of reasons that the market is sure to go up (or down) over the next X months, but who don’t know (and haven’t bothered to research) whether they should be maxing out their Roth IRA or 401k first.
Why is that?
We’ve been duped!
The financial services industry makes money when we trade stocks (or when we subscribe to newsletters promising to show us how to pick stocks).
They make money when we invest in their actively-managed funds.
They make money when we jump in and out of the market (or subscribe to their services telling us when to do so).
They don’t make money when we demand low-cost investment options.
They don’t make money when we hold stocks for decades at a time.
Is it any surprise then that they’re engaged in an ongoing media blitz to obfuscate the handful of things that really do matter when it comes to investing?
Discouraging investors
Not only are investors confused, I have little doubt that many would-be investors have given up without even trying. They’ve decided not to bother learning about investing at all.
After all, it’s extremely complicated and math-intensive, right? You have to calculate financial ratios, check your stocks online, and watch CNBC all day so you can figure out where the market’s going next, right?
Better to pay someone a small fortune to do all that for you.
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{ 6 comments }
It’s all about the money. And they want ours!
Most of the “expert” advice that I hear advocates not picking stocks and not timing the market.
Rob
When a salesperson can make a fat commission by getting a client to do something against his/her own best interests, money wins out and the salesperson convinces the trusting client to do the very thing that pays the commission.
That’s Wall Street.
Sadly, there’s little profit from educating the individual investor on better solutions for his/her investing dollars.
For me, it teaching them to reduce the risk of investing with conservative option strategies. For you it’s passive investing. But we earn zero commissions and you would think that would encourage investors to listen to our educational guidance – but it’s not going to happen.
The public prefers to take advice from those with a vested interest in making a sale.
Mike,
I agree that if Wall Street’s profits were aligned with investors’ interests investing would be very different. But since that isn’t the case investors really need voices that bring up these points. Blogs are one source, but financial advisors should be another.
@Mark
While not all people will realize the value of your advice and listen to it- some will! If some of your clients won’t listen to you then are you doing yourself or them any good? Instead, couldn’t you focus on finding those people that DO appreciate your advice and making them your clients? They then get the benefit of good advice, and because they value it you should be compensated fairly.
-Rick Francis
Well said! Wall Street has a vested interest in convincing us investing is harder than it really is. Dough Roller had a pretty fantastic rant on a somewhat similar topic today.
Most financial advisors are sales people in disguise. From a bib brokerage firm “help wanted” ad:
“You will acquire and deepen relationships with clients through comprehensive needs based selling of Investment products….” And continues: “The successful candidate will identify… prospective candidates, prepare presentations, close sales”
I found the word “sales” 5 times in this single page, which tells me that at least this firm is looking for salesmen, not someone able to help people make prudent investment decisions.
I could bet you that 99% of financial firms are looking for successful salesmen, not good advisors; and that they measure the success of their brokers based on the commissions they generate, not on the performance of their clients’ accounts.
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