Thursday, November 19, 2009

If your broker uses this line, please RUN AWAY

Lovely quote here:

"If you were Rip Van Winkle and had fallen asleep for a year, you wouldn't have known we had a crisis—and you would have saved a lot of sleepless nights," says , a Washington, D.C., financial planner.

That's from a recent WSJ piece called "Surprise! That 401(k) Account Is Looking Good."

I'll give the author the benefit of the doubt and assume she's calming investor jitters over their nest eggs. It's a great point to remind investors that their position might not be all that bad considering the market recovery and added benefit from regular contributions.

The worrisome aspect is the quote above from the financial planner. OF COURSE the portfolio is doing better thanks to contributions. Below is an example of a $100,000 portfolio over two years, in a fund that mimics the S&P500. The red line shows the account value without any monthly contributions, and the blue line includes contributions of $1,000 per month. With contributions, the account is positive over the period. Without them, it is down almost 20%, just like the index.

If the investor received a $50,000 inheritance windfall, would the adviser claim that the investor's account is performing fabulously thanks to this? "Hey Frank, wow your account's up $50,000 in a day!" It's not much different than the above points.

It's reasons like these that the NYTimes recently reported that 36 percent of wealth managers said they believed they were "not fully qualified to do their job."

Pulling the wool over investors' eyes by intentionally confusing performance with account value confirms that this industry peddles awful advice.

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