Saturday, December 24, 2022

Investment Advice

Most investment advice is self-serving for the person advising.

A reader writes, asking me what I thought of a particular bank's investment advice.  The problem I have with investment advice is that no one would give it away for free - or indeed, at any price.  If you had an inside track to the stock market and could predict the future, why on earth would you tell anyone about it?

If you could travel back in time with today's paper having the winning lottery numbers, would you:

(a) Go out and buy the winning lottery ticket, or

(b) announce the winning numbers in advance, so everyone could "share" in your good fortune!

Of course, you would do (a).  Option (b) is just stupid.  Assuming anyone would even listen to you, if hundreds or millions of people bought that winning number, the winnings would be divided up to the point where no one would win more than a few dollars.

Yet, every seminar scam is based on option (b) above.  The guy telling you how to flip "ugly houses" proclaims they made so much money doing this, that they want to share this "secret to success" with you!  MLM schemes use the same mantra - the people at the top of the pyramid want to help you succeed because they are nice people!  It isn't like they want your money or anything.

Investment gurus like "The Sooze" want you to watch their Tee-Vee shows and buy their books.  Storefront investment houses (and you know which one I am talking about - coming soon to an abandoned strip mall near you!) want to help you invest - for a percentage of your net worth, of course!

Or take the shouting guy on television - he says to BUY! and SELL! stocks to get rich, but his own track record of trading is shoddy.  He makes his real money from the salary he gets from the network to be the shouting guy - and from books and appearances he makes.  If he really had an inside track to investing, well, he would be investing, not shouting on television.  And from what I understand, he did try investing, and sucked at it, so he resorted to being the shouting guy, which turned out to be a more lucrative gig.

So how do you invest?  If you peel away all the glitz and glamour of these celebrity investors, who want you to buy their hyped stocks, attend their investment seminars, or buy their investment books, it all boils down to the same three principles, which all legitimate investment advisors will explain to you:

1.  You have to keep investing - putting money in - over time:  You can't just plop down $5000 on a trendy "stonk" and end up a millionaire.  Most of the money you take out of your 401(k) when you retire will be the money you put in - or at least a substantial portion of it will be.

2.  Diversify: Invest in a number of things, so that if one goes bad, the rest won't also go.  This does not mean you won't lose money on occasion - the overall market will go down every so often.  But over time, you will do well.  Maybe you won't make fabulous riches, but you won't be dead broke, either.

3.  Leave it Alone:  It is tempting to want to "time the market" by trading investments based on the news of the day or your perceptions of where the market is heading. By the time something is in the news, however, it is too late to time the market.  So just let go, invest your money in logical, ordinary things, and watch it grow over time.

Of course, this is boring advice.  We all want to be the next Billionaire, who saw that such-and-such stock was going places and had the foresight to invest when the timing was just right!  But the reality of such folks is that they got lucky a few times, and some of them got so lucky they had enough money to manipulate markets and make more money - or so they thought, in some cases.  We are seeing today, a lot of high-fliers who thought they were financial geniuses, now realizing they just got lucky early on, and then resorted to chicanery to keep it going.

Just walk away from that nonsense - it will bankrupt you.

A reader asks what I think of exchange-traded-funds (EFTs) versus Mutual Funds.  I am not sure there is really much of a difference for the ordinary investor.  We have a lot of money tied up in mutual funds (because historically, with an IRA or 401(k) those were the only choices).   A fund that invests in a number of things can do well over time, as it is not dependent on one individual stock or bond or whatever, to succeed.

And yes, you can invest in mutual funds and EFTs that track certain indices (DJIA, for example) or invest in certain things (bond funds, which haven't been doing well lately, thanks to inflation and rising interest rates).  I am not sure why an EFT is better (or worse) than a corresponding Mutual Fund that is invested in the same area.  Usually, you have to have an account with the fund company to invest in that mutual fund, but I notice lately that some mutual funds are offered on other platforms than the house that hosts them.

The majority of investments we have are in mutual funds, only because historically, most IRAs and 401(k)s were limited to mutual fund investments.  I did spend a few years with a self-directed IRA, buying and holding about 50 dividend stocks.  I did OK, but it really was just a self-directed mutual fund of income-producing stocks.  I am not sure I beat the market or anything.  Mark put his money in a mutual fund (Fidelity) that his father recommended and then basically ignored it for 30 years.  He did pretty well - probably better than I did!

Of course, your timeline is important as well.  If you are in your 20's, you can afford to take a higher risk in stocks.   But by your 60's, maybe you want to be in something less risky and more stable.  I have more money in boring things now, including cash, which I am spending, now that I am retired.

But the bottom line is, no one is giving away the goose that laid the golden egg (or selling stock in it).   Just walk away from anything that sounds too good to be true, or some kind of fast-buck something-for-nothing, wealth-without-work-or-risk kind of venture, because they are all pretty much con jobs.

The best investment "advice" is just common sense.  But you'll never get rich selling common sense!