Financial Advisors seem to consistently be on the wrong side of the trade |

Financial Advisors seem to consistently be on the wrong side of the trade

From today’s WSJ: Advisers Ditch ‘Buy and Hold’ For New Tactics http://online.wsj.com/article/SB124096109870565775.html. Here’s one quote (of many) of what advisors are doing for their clients:

Today, Mr. Seymour keeps about 90% of his clients’ money in such low-risk investments as short-term bonds, cash and gold. With some of the small amount that’s left over, he uses leveraged exchange-traded funds to place magnified bets both on and against the Standard & Poor’s 500-stock index.

It continues…

Buffeted by steep declines in stocks, many bonds, commodities and real estate, many advisers are questioning their faith in long-standing investment principles, such as controlling risk by building diverse portfolios. Some are adding increasingly exotic investments, including products that offer downside protection, to client portfolios. Others are trading more actively — and say they plan to continue to do so until they see evidence of a new bull market.

For starters, Mr. Seymour should read our post Levered ETF’s Are Not Your Friend from 4/27. The Mr. Seymour should think about how he defines risk for his clients. Lack of volatility? OK, cash and short term bonds fit that description (although gold does not). Permanent loss of capital? Considering the fact that both short term bonds and cash offer no return, his clients are accepting almost gauranteed small losses on a daily basis, while gold is a relative return play. Mr. Seymour might be able to play the gold market well, but I highly doubt that.

Interestingly, Mark Hulbert wrote about an indicator he’s been following for 20 years. It measures the sentiment towards buy-and-hold by advisors. As you can imagine, it is lowest near market bottoms: http://www.marketwatch.com/news/story/status-market-timing-popularity-indicator/story.aspx?guid=%7B9514E9B5%2D9949%2D4D0C%2DAFA5%2DAD8A7B40679B%7D&dist=msr_10. So maybe we should thank Mr. Seymour for coming out and telling his clients and the rest of us how this time it’s different and that there has been a fundamental shift in investing.

By the way, I am not saying that buy-and-hold-forever is the way to go. I am just critical of the way that most advisors determine what strategy they will use and when. The process for choosing a stock or a strategy is more important to me than which particular stock or strategy you choose. I believe in buying cheap assets and continually finding the cheapest assets out there. I too, provide some indication in a chaos-theory, post-modern way.

Last 5 posts by Yaron Sadan

That sinking feeling - May 18th, 2012
Opportunity on the horizon - May 18th, 2012
Early can hurt - May 16th, 2012
Diversify your Diversification - May 15th, 2012
Losing Money Isn't a Crime - May 15th, 2012