Ever wondered if you?d be better off with an independent financial consultant or investing your stocks yourself than with a huge investment firm? To understand the answer to this question you must first be able to separate investment fiction from investment fact.
The key to sorting through all the ?noise? that investment firms and financial consultants throw at you is to be able to deconstruct the myths they propagate. What is ultimately so confusing about working with big investment houses is that they combine fact and fiction into a top-notch convincing marketing campaign to get you to turn over your dollars to them.
For example, let?s consider the often repeated investment firm strategy of being fully invested in the market at all times no matter if the market is up or down. I believe in this theory because even if the market is tanking in the U.S., there is always still good money to be made through put options or by investing in other parts of the world. However, I do have a problem with the way Wall Street firms use fear to achieve this. Let’s re-visit the commonly quoted fact that:
?If you had missed the best 90 performance days in the market from 1963 to 1993 your average annual return would have dramatically fallen from 11.83% to 3.28% a year.? (Source: University of Michigan)
If we were to analyze this statement, then it is quite reasonable to analyze the assumptions behind this statement. Is it truly realistic to think that anybody?s luck would be so bad as to miss the best 90 days over 30 years even if they chose to be in and out of the market at certain times. What are the chances that they would miss all 90 of the best performing days? One in a million? See how deeply flawed this argument is. And this is the argument that financial consultants always use to sell you in staying fully invested. In fact, this selling point is often combined with the strategy of Modern Portfolio Theory, the name in of itself which is a misnomer. ?Modern? portfolio theory was once revolutionary, when it was developed, back in the early 1950?s.
In simple terms, modern portfolio theory calls for diversification of your stock positions across various sectors and industries to offset the potential of a poorly performing sector. In other words if you own stocks in trucking and shipping companies, then you might want to own oil companies as well, because if oil companies lag, then that translates into cheaper fuel costs for trucking and shipping companies, and this sector should offset lagging performance in the oil industry. The only problem with this theory is that you are not trying to create a zero sum game with your stock portfolio, but instead, trying to consistently find winners.
The big firms will tell you that it?s impossible to predict what industries will be up in certain years and what industries will be down, so that is why Modern Portfolio Theory is necessary. Again, I view this is a myth designed to build smoke screens to confuse the average investor. In today?s information technology age, access to information is so good that it is possible to predict what sectors will trend upward in a given year, and even to predict at times, what sub sector within those sectors will trend upward. But as I mentioned before, this takes time, and time is money with big investment firms.
In fact, access to information is so good today, that to stay ahead of the investment curve, every firm should be teaching their financial consultants how to access information through blogs, government websites, company websites, and political and technology websites instead of pounding outdated concepts into their brain. The information technology revolution is precisely why independent financial consultants have earned 20% gains for their clients during times the S&P was down more than 20%.
Big investment houses will tell you that individual stock selection is not nearly as important to your performance as being invested in the right sectors. This is another myth. If you really give this more than two seconds thought, does this statement make any sense?
Do you truly believe that if you own a mining company in Canada versus one in the United States that may own rights to drill in completely different geographical locations that this will not matter to the stock price of these two companies? Do you really think that if you own internet companies in India versus internet companies in Japan, that the vastly different stages in the growth cycle of this industry between these two countries will not make a difference to the performance of your portfolio? Do you truly believe that if you invest in nanotechnology firms with a world leader like the U.S. versus nanotechnology firms in Russia, that it doesn?t make a difference? I could go on endlessly about just how ludicrous this statement really is.
Performance of your stock portfolio is all about selecting the right STOCKS in the right SECTORS in the right COUNTRIES at the right TIME. So why do investment firms work so hard to convince you otherwise? For the most part, because they don?t teach their financial consultants how to be great stock advisors and how to identify opportunities in the global markets that will maximize the returns in your portfolio. They teach them to be great salesmen and saleswomen and great marketing gurus. If you are truly serious about maximizing the returns in your stock portfolio, the simple truth is that you probably want to stay as far away from the mainstream firms as you can. Either learn how to use accessible information to earn superior returns yourself or find a financial consultant who will. Do that, and I guarantee that you will immediately start reaping the benefits and earning better returns from your stocks.