We’ve started a new investment feature designed to give you some background on current market trends. Our seventh piece discusses why you should probably ignore a lot of those flashy advertisements you see from the financial industry.
We’ve all seen them. Pick up any magazine or newspaper and they are filled with advertisements like the ones below:
1) Frugal to a fault: 6 Money Saving Mistakes
2) 5 New Ways to Save Money on Travel
3) 10 Ways to Prepare for Retirement
So now that I’ve gained your interest I’d like to review my steps to make you a better investor:
Be very skeptical of any advertisement that begins with a number. Advertisers know that busy individuals are always trying to simplify their lives so they create ads that appeal to this desire. Who doesn’t want to be a better investor? And if following just 5 simple rules would do it then I’d be foolish not to read further.
Be skeptical of investment firms that use celebrities to market their products. Celebrities are expensive marketing tools that usually sell style and image. Investors shouldn’t be concerned with style and image. They should be concerned with returns and safety. Bernie Madoff, who defrauded investors of billions of dollars, used his image as a money manager who no longer took investor money because of his success to lure additional money from investors chasing image and style. Before his Ponzi scheme collapsed, it was considered very fashionable in certain circles to have investments with Bernie Madoff.
Be skeptical of investment firms that highlight their best performing funds with data that is difficult to understand. Investment firms like Vanguard and Fidelity have hundreds of mutual funds that they manage. Highlighting just a few funds with investment returns with opaque data can cause investors to chase ‘hot’ mutual fund managers who can suddenly go cold. From 1991 to 2005, Bill Miller’s Legg Mason Value Trust outperformed the S&P 500 every single year building his reputation as one of the top mutual fund managers of his generation. Yet by year-end 2008, his Value Trust was among the worst performing mutual funds in its class for the last one-, three-, five- and 10-year periods. Investors who chased his fund before the recent financial crisis paid dearly for chasing a ‘hot’ manager.
Be skeptical of investment firms that use quotes from the financial press like Forbes magazine or the Wall Street Journal. Quotes offer very little to an individual investor. More often than not these quotes are taken from more in-depth articles offering additional disclosures to investors. Individuals need knowledge not quotes to make decisions.
Be skeptical of advertisements that appeal to your dreams. Financial firms like to show us pictures of retired couples smiling and looking at their financial statements from the porch of their beach homes. Unfortunately, these ads appeal to your emotions as they suggest you could be living this dream by investing with that firm.
As an investor, it is your job to understand your investments. That means you have to understand the psychology of how investment firms are appealing to you to avoid serious missteps.
Disclaimer: The information contained in this article is not a solicitation to sell securities or investment advisory services where such an offer would not be legal. Information included in this statement regarding market or other financial information is obtained from sources believed to be reliable. Past performance is never a guarantee of future performance.
John Maguire has been an Investment Advisor for more than 30 years. He is a Managing Partner of Hinsdale-based Rationalis Capital Management, LLC, online at www.rationaliscapital.com. He can be reached at firstname.lastname@example.org.