As a former Black Jack dealer in Nevada, I've witnessed people lose thousands of dollars trying to beat me at my own game. Bill Harrah's casino was the house and I was their loyal employee.
Come to think of it...this is what most individuals and their advisors alike are doing when it comes to the stock market.
If you think of the stock market as the "house" and all the individuals participants as the "players", the odds are actually worse than the casino.
In fact, the odds are better than 3:1 against you-The case for index-fund investing
Still think you or your advisor can beat the market?
According to Nobel Prize winner Eugene Fama and his colleague Kenneth French, the odds of picking a winning stock picker or active manager that can consistently beat the market are less than three percent-Another nobel prize to our strategy.
Don't trust these two ivory tower academics?
Here's what one of greatest investors of our lifetime said when asked for investment advice at the 1994 Berkshire Hathaway shareholder meeting.
"We never recommend buying or selling Berkshire. Among the various propositions offered to you, if you invested in a very low cost index fund -- where you don't put the money in at one time, but average in over 10 years -- you'll do better than 90% of people who start investing at the same time."
Hmmmm...10% odds you beat the market. 90% odds you do better than everyone else by simply being the house and buying the market.
This is why we tilt the odds in our favor and work with the market rather than against it.
Yes.....the market is fickle. Frankly, she is like a neurotic mistress.
For instance, last year she was ecstatic judging by the stellar return of the S&P 500 index. If you weren't diversified and put all your money in this particular asset class, you hit a home run.
This year, she's a bit depressed now that the Fed is easing off the throttle of quantitative easing and the S&P 500 index/asset class is doing terrible.
No worries, we always have our girl's back and simply invest along side her without trying to beat her at her own game. In a given year, there is always an asset class she loathes and will readily sell to the patient investor.
When Lehman collapsed in 2008 we happily sent her cash from our bond sales to help her unload some stocks.
In March of 2009, when the media was screaming the sky is falling and the Dow fell below 7,000 we stepped up our game and asked for more stocks. She was so busy buying gold, she happily filled our order.
We get excited whenever we get a chance to rebalance our clients portfolios. By taking profits from the winners and investing in the losers, we can't help but buy low and sell high. When you invest in multiple markets around the globe as part of a diversified portfolio, there is always an opportunity to take some profits and invest in the asset class that is doing terrible.
Buy-hold-rebalance is our mantra.
No need to time the market, fire a poor performing money manger (we buy markets not managers) or bet the farm on the next hot thing.
Right now our neurotic mistress hates emerging markets, real estate investment trusts and bonds judging by the record amounts of cash flows that were exiting these asset classes last year.
Back to the original premise of this article.
I would highly recommend that anyone who is interested in their retirement sit down and watch this documentary today.
It's also available via iTunes or your android device as a podcast episode.
Here are a few key points to consider:
Many Americans have no idea how much money is being siphoned away from their retirement accounts in the form of hidden fees. While some of the fees are buried in a prospectus and a statement of additional information, most people have no desire to sift through a 100 page legal document to determine how much their mutual fund manager is charging them to invest their paycheck.
Worse, some think the 401k plan is free!
The head of retirement planning for Prudential has never heard of any unbiased study that shows the benefits of working with the market (passive investing) versus hiring an expensive money manager to fight the market (active investing).
For more than five decades the "active versus passive" debate has been one of the most hotly contested topics on Wall Street.
The vast majority of banks, brokerages, insurance companies, registered representatives and other financial salespeople operate under this thing called a suitability standard — which basically means they don’t have to give you advice that is in your best interest like we do. The advice has to be "suitable."
Would you rather have a Doctor prescribe a suitable surgery or one that is in your best interest?
Here are three questions to ponder the next time you open your brokerage or 401k statement.
1. Is your financial advisor operating under the suitability standard?
2. Are you paying too much in fees as a result of fighting the market?
3. Does your advisor advocate stock picking, tactical allocation or finding managers that attempt to beat the market?
If you answered yes to any of these questions, you should seek a second opinion from a registered investment advisor or advisory associate whose investment philosophy is aligned with the market and your best interests.