Blog cafe : False prophets

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: In these troubled times, there is no shortage of advice for beleaguered investors. A well-known advisory firm wrote to its clients that “we have not reached the ultimate bottom” and a “larger rally will have to shake off the sell the rally crowd.” Other pundits view the meltdown as a “buying opportunity” and are urging their clients to buy stocks “now.” Few of these advisors told investors to flee to cash and avoid the market crash. Do you really have confidence they are right now? Advisors who want to be honest will tell their clients they have no idea when the markets will “reach the ultimate bottom.” All we can realistically do is place the current markets in historical perspective.

While no one knows what the future will hold, data validates a long term strategy of determining your asset allocation and holding a globally diversified portfolio of stocks and bonds using low cost index funds, Exchange Traded Funds or passively managed funds. Instead of relying on the flawed predictive powers of those who shamelessly peddle this ability, consider a study that reviewed the returns of 2,076 actively managed US open-end, domestic-equity mutual funds that existed at any time between 1975 and 2006. How many of these fund managers demonstrated the skill necessary to “beat the markets” and add value to their shareholders? A pathetic 0.6%!

What advice are you receiving from your broker or advisor? “Buy stocks” or “flee to safety”? Here is the ultimate irony: It is bad enough that they don’t have the expertise to give you this advice. It is worse that they encourage you to hold actively managed mutual funds that have a minuscule chance of adding value to your portfolio.