Truepoint Investor

Human beings have an astounding ability for self-deception when it comes to our own money. We tend to rationalize our fears with logical sounding arguments. These arguments are often elaborate, short-term excuses used to justify behavior that runs counter to long-term interests.

It is very likely that, at some point during an investor’s life, they will be faced with a difficult decision of when to invest a large sum of cash.

Mutual fund and ETF products are often touted in the financial media as efficient vehicles for achieving portfolio diversification. However, most investors are unaware of the additional benefit that is derived from security lending programs. But, as is true with most investment considerations, not all mutual fund families have their shareholders’ best interests in mind.

On Wednesday, an executive director of Goldman Sachs publicly announced his resignation in a scathing New York Times op-ed. His commentary serves as a strong reminder of what can happen when firms are not legally compelled to act in the best interests of their clients.

As emphasized by Yale Univeristy’s chief investment officer recently, the investment industry continues to mislead and exploit investors through its focus on active management, Morningstar ratings and past performance.

While many investors understandably assume that all who offer investment advice are required to uphold the fiduciary standard, many in the financial services industry are instead subject to the less stringent “suitability” standard. A recent $54 million judgement brings to light a stark example of the conflicts that may arise when an advisor is not required to act only in the best interest of their clients.

So how can an investment advisor add value? While history shows the ability to pick stocks or time the market to be a faulty premise, a potential critical benefit an advisor may deliver – which is often overlooked because it is difficult to measure – is providing a client with an external source of discipline. We review the interesting findings of a recent study examining this topic.

Inspired by a terminal cancer diagnosis, former Wall Street banker Gordon Murray spent the final months of his life delivering a message of prudence to investors. Interestingly, it’s not the message one would expect from a product of the beat-the-market Wall Street investment culture. We would like to outline Gordon’s story, and offer you a copy of The Investment Answer, the legacy he left behind.

While policitical pundits and economic analysts are typically impressive in their knowledge and confident in their assessments, have you ever wondered if anyone is tracking the accuracy of their predictions? Philip Tetlock did. In fact, it led the professor of psychology to examine two decades of expert forecasts.

Charles Ellis is a legendary financial consultant who advises institutions and governments around the world on investing. For many years he chaired the investment committees at both Harvard Business School and Yale School of Management, and he also chaired the CFA Institute, the global association of investment professionals. Mr. Ellis was recently the featured guest on Consuelo Mack WealthTrack and following is a sampling of his words of wisdom for investors from that interview.

Though final approval of the financial reform bill has yet to occur, House and Senate negotiation regarding the regulation of financial advisors is complete. Unfortunately for investors, the bill fails to apply the fiduciary standard to all who offer investment advice. However, a step in the right direction is included.

In a recent investment Webinar, Brad Reed and Scott Keller explained the costly flaws inherent in conventional investment wisdom while outlining a prudent process for portfolio construction and management.

A recent study by prominent academicians Eugene Fama and Kenneth French analyzed the returns of actively managed U.S. stock mutual funds to evaluate the presence of skill among active managers. The professors conclude that only zero to 3% of active managers exhibit the skill sufficient to outperform a comparable efficiently managed passive fund.

2009 marked the end of a tumultuous decade for stocks, one labeled the “Lost Decade” by the Wall Street Journal and “The Decade from Hell” by Time magazine. Despite an astounding 68% rebound from the March 2009 lows, the S&P 500 Index still lost 9.1% for the 2000s – the worst calendar decade in market history. While it’s hard to argue with the headlines, a minority of individual investors (including our clients) actually found the decade to be a productive one.

“At the end of an investor’s life, less than 5% of his total lifetime return will come from what his investments did versus other, similar investments. The other 95% will come from how the investor behaved. And the primary determinant of that behavior will be the quality of the advice he got, or didn’t get.”

As part of the overhaul of the financial services industry, the Obama Administration has proposed holding anyone who offers investment advice to individuals to a fiduciary duty – a legal standard that requires acting in the client’s best interest. Though many may assume this to already be a universal principle, the brokerage industry is hard at work lobbying to maintain its long-standing exemption from the fiduciary standard.

In the face of depressed market prices and dramatic volatility, some investors and commentators have characterized this a “stock-picker’s market.” However, despite the perception of increased opportunity, data show the challenge of succeeding with active management to be no less daunting.

By now you may well be familiar with the running battle that has developed over the past few weeks between John Stewart of Comedy Central’s “The Daily Show” and Jim Cramer of “Mad Money” fame on CNBC. Though done comedically, Stewart shined a light on a key issue: the role of the financial media.

The above quote, credited to Nobel-prize-winning physicist Neils Bohr, comes to mind in assessing the current market environment and what it may mean for investors going forward. The truth contained in Bohr’s observation is highlighted every year in the prognostications of market economists – but perhaps no more so than in 2008.