As legendary trader Jesse Livermore once put it: "If there is any easy money lying around, nobody is going to stuff it into your pockets." Nobody cares about your money more than you do. So why not manage it yourself?
The bottom line
Most people are intimidated by the complexity of the financial world, yet it is surprisingly simple. At the bottom of the enormous pyramid are two types of investments - stocks and bonds (equity and debt). You either get a stake in somebody else's business, or you lend them money at interest.
That's it. There is nothing else. Everything else is a derivative. Pool stocks and bonds together - there is your mutual fund. Put that mutual fund in a tax deferred account - there is your 401(k), IRA, or variable annuity. Make bets on the direction of stocks or bonds - there are your options. ANY financial product can be reduced to stocks or bonds.
Each time you add a layer, there is a fee. A whole army of financial professionals - brokers, managers, analysts, advisors, sponsors - live off of the 1% they charge for the service. 1% off YOUR money. These percentages add up. Are you getting your money's worth?
Every year the market hands out plenty of opportunities to create wealth, but I have yet to meet an individual who was made rich by their financial advisor. Wall Street figured out long ago that MANAGING everyone's money for 1% is much more lucrative than trying to make a few rich. That's the bottom line. But what's in it for you?
Let's look at some of the most common fallacies:
Buy and hold
The name of the game these days is asset gathering, because if your advisor has $100M under management, a 1% annual fee is all he needs. But markets don't just go up - they go up, down, or sometimes nowhere. Some times it's good to be in the market, other times it's not. But what if your advisor has to move $100M he manages into cash? Will he still be able to charge 1% for having your money in a money market account yielding 2%? I don't think so. So his goal is to keep you fully invested at all times by feeding you the familiar story: over the long haul... nobody can time the market... As a result, in a bear market like today you spend months watching your portfolio shrink until you sell in disgust and start searching for a new advisor.
Since 75% of the market is controlled by institutions, THEY cannot time the market. They ARE the market. Whom are they going to sell to? But you - the individual investor - can.
Asset allocation
There are many different types of stocks: large caps, small caps, utilities, foreign, emerging markets; and bonds: government, corporate, municipal, high grade, low grade, short term, long term; as well as different investment styles: value, growth, momentum... Most advisors advocate wide diversification, or, as they now prefer to call it, asset allocation, spreading your portfolio across the entire market, which GUARANTEES one thing - that you will underperform the market since what you will get is the market returns less fees and commissions.
Investor protection
Your advisor will recommend investments that are "appropriate" for your situation and risk tolerance level. The problem with "appropriateness" is that it is lawsuit driven. Lawsuits subtract more from profits than stock picking can contribute. Strict profiling guidelines enforced by compliance departments virtually guarantee that you will be left out of real market opportunities in favor of mediocre products that are "safe" for your advisor to recommend.
Professional selection
Supposedly, your advisor is well versed in all types of investments and has the expertise to guide you through the maze of CDOs, CEFs, ETFs, and SIVs to select the right products for you to construct a personalized portfolio based on your individual needs and goals. Right? Wrong! Your advisor is an asset gatherer, and the only thing he is good at is SELLING. Don't believe me? Ask your advisor where he thinks interest rates are going to be 12 months from now. If after the usual financial mumbo-jumbo all you get is "nobody really knows," then it's time to move on: if he does not know either, then why should YOU be paying HIM?
Which brings me to the final point: how do you manage your portfolio? Where do you find the time and resources to learn all about the market? We will cover that in Part II.
Slav Fedorov is a full time stock trader and founder and managing member of TradingZoom, LLC - a provider of proprietary trading data that swing traders can put to work right away. http://www.tradingzoom.com
The bottom line
Most people are intimidated by the complexity of the financial world, yet it is surprisingly simple. At the bottom of the enormous pyramid are two types of investments - stocks and bonds (equity and debt). You either get a stake in somebody else's business, or you lend them money at interest.
That's it. There is nothing else. Everything else is a derivative. Pool stocks and bonds together - there is your mutual fund. Put that mutual fund in a tax deferred account - there is your 401(k), IRA, or variable annuity. Make bets on the direction of stocks or bonds - there are your options. ANY financial product can be reduced to stocks or bonds.
Each time you add a layer, there is a fee. A whole army of financial professionals - brokers, managers, analysts, advisors, sponsors - live off of the 1% they charge for the service. 1% off YOUR money. These percentages add up. Are you getting your money's worth?
Every year the market hands out plenty of opportunities to create wealth, but I have yet to meet an individual who was made rich by their financial advisor. Wall Street figured out long ago that MANAGING everyone's money for 1% is much more lucrative than trying to make a few rich. That's the bottom line. But what's in it for you?
Let's look at some of the most common fallacies:
Buy and hold
The name of the game these days is asset gathering, because if your advisor has $100M under management, a 1% annual fee is all he needs. But markets don't just go up - they go up, down, or sometimes nowhere. Some times it's good to be in the market, other times it's not. But what if your advisor has to move $100M he manages into cash? Will he still be able to charge 1% for having your money in a money market account yielding 2%? I don't think so. So his goal is to keep you fully invested at all times by feeding you the familiar story: over the long haul... nobody can time the market... As a result, in a bear market like today you spend months watching your portfolio shrink until you sell in disgust and start searching for a new advisor.
Since 75% of the market is controlled by institutions, THEY cannot time the market. They ARE the market. Whom are they going to sell to? But you - the individual investor - can.
Asset allocation
There are many different types of stocks: large caps, small caps, utilities, foreign, emerging markets; and bonds: government, corporate, municipal, high grade, low grade, short term, long term; as well as different investment styles: value, growth, momentum... Most advisors advocate wide diversification, or, as they now prefer to call it, asset allocation, spreading your portfolio across the entire market, which GUARANTEES one thing - that you will underperform the market since what you will get is the market returns less fees and commissions.
Investor protection
Your advisor will recommend investments that are "appropriate" for your situation and risk tolerance level. The problem with "appropriateness" is that it is lawsuit driven. Lawsuits subtract more from profits than stock picking can contribute. Strict profiling guidelines enforced by compliance departments virtually guarantee that you will be left out of real market opportunities in favor of mediocre products that are "safe" for your advisor to recommend.
Professional selection
Supposedly, your advisor is well versed in all types of investments and has the expertise to guide you through the maze of CDOs, CEFs, ETFs, and SIVs to select the right products for you to construct a personalized portfolio based on your individual needs and goals. Right? Wrong! Your advisor is an asset gatherer, and the only thing he is good at is SELLING. Don't believe me? Ask your advisor where he thinks interest rates are going to be 12 months from now. If after the usual financial mumbo-jumbo all you get is "nobody really knows," then it's time to move on: if he does not know either, then why should YOU be paying HIM?
Which brings me to the final point: how do you manage your portfolio? Where do you find the time and resources to learn all about the market? We will cover that in Part II.
Slav Fedorov is a full time stock trader and founder and managing member of TradingZoom, LLC - a provider of proprietary trading data that swing traders can put to work right away. http://www.tradingzoom.com
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