The American people have lost faith in the stock market and the advice of financial advisers who make a living from it. And with good reason. The question now is how do you protect your money and grow it safely?
The path to investment success starts by understanding that the existing system was developed by the financial services industry for its own benefit and to guarantee their profits whether their clients make money or not. Their goal is to make as much money as they can for themselves and they use every ounce of the considerable sales and marketing resource at their disposal to bury anything that interferes with that goal.
In fact, there are many independent studies that prove that the financial industry historically fails to do a good job for its customers and that people are better off managing their own investments and investing in no-load (no commission) index funds that simply track the market as a whole.
Let’s take a look at two of the most powerful of those studies. Here’s an especially impressive one that came out in 2007 titled “Assessing the Costs and Benefits of Brokers in the Mutual Fund Industry” by Daniel Bergstresser of the Harvard Business School.
It was such a monumental study it was coined, “The Study of the Decade.” The financial industry supported the study, provided the data and was confident the results would be a valuable marketing tool to show and recruit clients. Instead, the results of the study proved the opposite. Here are the key conclusions:
- As a group, financial advisers not only underperformed the market as a whole, they underperformed what most people do on their own without an adviser.
- Individual investor’s returns were over twice those of the experts’.
- Advisers do not provide superior asset allocation.
Here are the results of a second very powerful study, the 2004 Dalbar Quantitative Analysis of Investor Behavior:
This study covered the time period of 1985-2004, which was far and away the 20 greatest years in U.S. stock market history. The conclusions are shocking. Incredible amounts of money were made during those years, the stock market grew by an amazing 700 percent! Yet most people, following the advice of the financial services and financial media, rolled from one “hot” mutual fund to the next, being encouraged and advised to “outsmart” the market, made essentially nothing! The poor performing funds and the endless fees took out virtually all their profit beyond that of inflation. The study found:
- The average annual return of the S&P 500 market was 13.2%, but the average stock fund investor earned 3.7%
- $10,000 invested in the S&P 500 index (the market as a whole) became $119,943 in 20 years, whereas the average stock fund investor’s $10,000 became $20,816 over the same 20 years, and the value of the original $10,000, adjusted for inflation, was $18,068
So where did everyone’s money go, the retirement money of tens of millions of people? First and foremost it went to pay for the multi-billion dollar financial services industry. Second, it was lost to gross investment incompetence by an industry that doesn’t know how to invest successfully, but does know how to successfully sell the idea that they do. The reality is that Americans have been subjected to one of the most effective and most destructive marketing campaigns in history.
I’m not the only financial expert pointing out the flaw in the standard advisor-driven approach to investing. Two of the arguably greatest investors in stock market history agree. Peter Lynch says, “(Most investors would) be better off in an index fund.” Warren Buffet says, “The best way to own common stocks is through an index fund.” They too are effectively saying that the best strategy is to avoid advisors and their many mutual funds in favor of the low fees and greater success of an index fund that tracks the entire market.
So, reject the current approach to investing, and replace it with a better one. The approach I’ve outlined in Money Smart is simple, and everyone can do it for themselves. Never forget that it’s your money and your future, and that nobody is ever going care as much about these things as you. Manage your own investments and you’ll find that you’ll win, and that the financial freedom you’ve worked so very hard for will turn out to be very achievable.
See also: The ETF Scam: Beware of Misleading Financial Advice