No one does propaganda like mutual fund companies.
What a knack they have for dispensing investing advice that is larded with self-interest.
A classic example of this is a handout from one particular mutual fund company called "Eight things every investor should understand about his or her portfolio." There's no point naming the fund company because it could have come from any of them.
On your first read through of this two-page sheet, you'd probably find yourself nodding at each point. And truth is, there's not a thing wrong with any of the eight suggestions.
Then again, the subtext of the whole exercise seems to be something along the lines of sit down, shut up and invest. It's worth taking a closer look at this advice because it's the kind of thing you'll see a lot of if the war in Iraq produces more days like yesterday on the stock markets.
Point One reads: "I understand that my portfolio may be down at different points in time. I am aware that staying fully invested and even adding money is what many successful investors do at these times."
By now, most investors will have grasped the concept that their portfolios can fall in value. As for staying invested and buying low, these are tried and true strategies that have been utter failures for anyone who followed them since the market started going south three years ago.
Decades from now, it's quite likely that these same people will profit from the money they invested at the worst of the bear market.
The hitch is the short-term pain necessary to reach the long-term gain.
Some day, maybe a fund company will address this dichotomy. Or not. If clients aren't fully invested and riding out the bad times, after all, then that threatens the livelihood of mutual fund companies and mutual fund sellers.
Point Two talks about the benefits of systematic investing, or dollar-cost averaging, where you invest money into the markets at regular intervals.
It is correctly pointed out here that when the price of an investment goes down, your regular purchase will buy more shares or units.
Again, this is a beneficial strategy over the long term if you don't have a lump sum to invest (studies have shown it's better to invest this in one fell swoop). But dollar-cost averaging equity investments over the past few years has sort of been like falling down a long set of stairs.
The news isn't all bad, though. Your systematic investing plan has systematically made money for your adviser.
Point Three is insightful. "I understand that I will be disappointed at one time or another with each of the funds in my portfolio," it says. "I know that this is one of the biggest reasons for having a fully diversified portfolio in the first place."
It's unquestionably true that diversification is all about not having everything in your portfolio moving in the same direction. But it's just as true that you're going to be justifiably peeved at funds in your portfolio at one point or another, and that ditching them is exactly the right thing to do.
Point Four talks about the tendency for investors to chase the winners and shy away from the losers in their portfolios. That's a fair point, but it fails to consider the fact that there's so much rotten in the marketplace that it's hard to have confidence in once-esteemed investments that lost money.
Point Five offers some finger waving about following hot tips. No quibbles here.
Point Six offers some bafflegab about not getting too upset if indexes outperform your portfolio from time to time, the point being that a diversified portfolio seeks market-like returns with less risk.
Translation: Things may suck right now, but stick with it, kid.
Point Seven is both laudable and laughable. "I understand," it says, "that I will read both positive and negative articles on the investments I own. I know that my adviser has researched these investments and continues to monitor them for appropriateness."
Bracing people for reading negative things about their investments is a smart thing to do. After all, there's no such thing as an objectively good investment.
What's laughable is suggesting people take it for granted that their advisers spent much time researching their investments, and that advisers continue to monitor these investments.
Some advisers do this, others just sell mutual funds in the same way that others sell aluminum siding or cars. That is, hype the product, close the sale and move on.
Point Eight picks up on the theme of the wise adviser by noting that sometimes the best advice to an investor is to sit tight and do nothing with your portfolio. "I understand that time in the market, not timing, is the key to success for long-term investors."
In the grand scheme of things, this is flat out true. It's also sufficiently devoid of detail to be highly misleading.
Exactly how much time in the market is required here? The other day I heard from a reader whose holdings in one of the largest equity funds in the country is the same now as it was in 1994.
Promoting long-term investing is fine, but without context it's just propaganda.
© 2007 The Globe and Mail. All rights reserved.
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