Investors Flunk The Test, Revisited
FORECASTS & TRENDS E-LETTER
IN THIS ISSUE:
1. NASD Investor Survey Revisited
2. Many Investors Are Misinformed
3. Chasing The Latest “Hot” Returns
4. Why Investors Don’t Reach Goals
5. Put Professionals On Your Team
The US stock markets have been on a roller-coaster so far this year. Right out of the box, the Dow Jones fell from 10,800 to below 10,400 in the first three weeks of the new year. Then just as abruptly, the Dow ran right back up to the 10,800 area in late January and so far this month. A headline in yesterday’s Wall Street Journal read: “Stock Investors Fall In Love Again."
I don’t think so. The stock markets have been very frustrating for millions of investors over the last couple of years, especially for those who manage their own stock and mutual fund portfolios. 2003 was a great year for stocks (S&P 500 gained over 28%), but many investors missed that bull run because they fled to the sidelines (cash) during the bear market of 2002.
For most of 2004, stocks trended sideways to lower, but then we saw a strong rally in the last two months of the year. After trading lower all year, the Dow finished 2004 up 5.2% and the S&P 500 was up 10.7%. Yet many individual investors missed that rally as well. And as noted above, the roller-coaster has continued so far in 2005.
Since I don’t agree that stock investors have fallen in love again, as the Journal suggested on Valentines Day, I want to revisit an investor survey conducted by the National Association of Securities Dealers (NASD) a couple of years ago. The survey asked over 1,000 known investors some fairly basic, multiple-choice investment questions, in the hopes of gleaning how knowledgeable most investors are, or are not. The results were quite surprising and suggest the latter. This week, we’ll look at several of the basic questions the NASD asked and the overall responses. You may be surprised at the results.
I will also restate the reasons why I believe that most investors are much better served by having professional money managers oversee most of their stock and bond investments. I take my own advice, by the way, even though I have been in the investment business for 28 years. All of my stock and bond investments are directed by professional money managers. More on this later.
In late 2003, the NASD surveyed 1,086 people who were known to have made at least one investment in that year. The survey was sent to investors whose portfolios ranged from as little as $10,000 up to a maximum of $500,000. Over two-thirds of the survey respondents (69%) described themselves as being at least “somewhat knowledgeable” about investing. Only 12% admitted to being “not at all knowledgeable.” With that in mind, let’s look at some of the responses.
First, there was considerable misunderstanding as to the basic types of investments. For example, 60% of respondents said they own stocks, yet 21% of survey respondents did not understand the concept of a stock. While most understood that owning a stock means that you own a piece of the company, here was the real shocker: Almost half of the respondents believed that stocks are insured against losses!
To be fair, the question was somewhat “loaded” in that the survey listed several organizations (SIPC, FDIC, etc.) and asked, “Which of the following organizations insures you against your losses in the stock market?” Again, nearly 50% of the survey respondents thought that their stock market losses were insured! The correct answer was NONE of the above. No agency insures against stock market losses.
Likewise, 70% of the survey respondents did not understand that when one buys stock on “margin,” he or she can lose ALL of the investment, even if the value of the shares does not go to zero. When investors buy stocks on margin, using loans from their brokerage firm and putting up the securities they buy as collateral, they can potentially lose all the money they paid for the stocks, but also the amount they borrowed.
Regarding mutual funds, the results weren’t any better. While 60% of respondents said they owned mutual funds, 80% did not know the definition of a “no load” mutual fund. The survey also suggested that many investors do not know the difference between loads (sales charges) and normal operating expenses of mutual funds.
So, how about bonds? 29% of respondents did not understand the concept of a bond. 60% did not understand that if interest rates rise, most bonds lose value. Only about half of the respondents knew the definition of a “junk bond.” Almost 70% of the survey respondents did not understand why municipal bonds offer lower pre-tax yields.
Unreasonable Expectations For Returns
The NASD survey asked several questions about what level of long-term returns (performance) was expected in the stock markets. One such question asked, “What is a reasonable average annual return that can be expected from a broadly diversified U.S. stock mutual fund over the long run?” 21% answered that they expected returns of 15-25% annually. Only 40% chose the more reasonable answer of 10%.
Only 51% of the survey respondents knew that stocks have yielded higher average returns than most other investments over long periods of time. Second, a surprisingly large percentage of survey respondents (28%) did not understand that, in general, certain investments which have higher risks also have the potential to provide higher returns over time than investments with less risk.
And here is the clincher:
Overall, only 35% of respondents scored a passing grade on the NASD survey. 97% admitted they needed to be better educated about investing.
Finally, the NASD did provide a breakdown on which groups fared best in its survey. The notable findings are: older respondents (50+) did better than younger (21-29) respondents; men did better than women; higher income ($100,000 and greater) did better than lower income (less than $50,000); and primary decision-makers did better than shared decision-makers.
Chasing The “Hot” Funds
To illustrate, I will use a good period in the stock markets. The following numbers from Dalbar represent diversified stock mutual funds, which tend to track very closely on average with the S&P 500 Index, and bond/fixed income funds, which tend to track closely with the long-term Government Bond Index. Read these numbers closely.
In the period from 1984 to 2000, the S&P 500 Index gained 16.3% on average per year; however, the average investor in stock mutual funds gained only 5.3% on average during that same period, according to Dalbar. Surprised??
The problem is, most investors jumped around from fund to fund during that period, often buying high and selling low. Yes, the investors who bought the average stock funds and/or bond funds, and held them for that entire period, made roughly what the market indexes made: 16.3% on average for stock funds and 11.8% on average for bond funds. But most investors didn’t. Due to bad timing, they didn’t make nearly as much as the average mutual funds. And this was during the greatest bull market in history for stocks!
As noted above, I have thousands of investment clients all across America.
Most are “accredited investors,” meaning that they have net worth of at
least $1,000,000. In all these years, I don't remember a single client
telling me that they made most of their wealth from their investments.
No, in most cases, they became wealthy as a result of their primary business
When I say “professional money managers,” I am not referring to your
stockbroker. Specifically, I am talking about Registered Investment
Advisors and professional fund managers. There are successful Investment
Advisors, with proven performance records, that can direct your investments
in stocks, bonds, mutual funds and in other areas.
How Do You Find Them?
If you have read my weekly E-Letters for long, you know that my company – ProFutures Investments – specializes in tracking and monitoring a large number of professional money managers. We continually look for successful Investment Advisors to recommend to our clients. By the way, I invest my own money with every manager we recommend.
You can try to find these top-rated professionals on your own, but it is very expensive to do it right. We spend hundreds of thousands of dollars searching for good money managers all across the country (and even in some foreign countries).
Most (but not all) of the money managers we recommend use mutual funds as their investment vehicle. We have managers who specialize in equity mutual funds, and others who specialize in bond funds of various types.
I happen to favor managers who have the flexibility to get out of the market, either partially or altogether, if their systems indicate a bearish trend. In the last few years, more and more money managers have implemented “hedging” techniques by using specialized mutual funds which go up in value when the markets go down. So instead of selling out positions when they get a bearish signal, they merely hedge them. Our newest recommended Advisor – Third Day Advisors (which I wrote about on January 18) – can “short” the market during downturns. Yet we also have managers and programs that are fully invested at all times.
Our list of recommended managers ranges from conservative to moderate to aggressive in terms of their investment styles and objectives. We try to match our clients with those managers who best fit their investment goals and risk tolerance.
Getting Professionals On Your Team
If you are not getting the investment returns you want, maybe it’s time to check out some of the professional Investment Advisors I recommend. If you are not making what the mutual funds make, as the Dalbar studies indicate, then you may want to put a good chunk of your investment portfolio in the hands of proven professionals, just as I do.
Some of my best sources, including The Bank Credit Analyst, believe there is a good chance that the stock markets are rolling over to the downside. While that is not clear yet, 2005 is may prove to be another frustrating year for most investors. This is another reason to have professionals with time-tested systems on your team.
You can look at the performance records of several of the professional Investment Advisors I recommend by visiting our website. Or better yet, you can call us at 800-348-3601, and we can help you put the power of professional management in your portfolio.
One of my experienced Investor Representatives will be happy to visit with you. All of our Representatives are on salary (no commissions), and there is never any pressure to invest.
Finally, it does not matter where you live - we have clients all across the country, many of whom I have never met. It makes no difference if you live one place, the Advisors live in yet other places, and we are in Austin, TX.
Wishing you profits,
Gary D. Halbert
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Forecasts & Trends E-Letter is published by ProFutures, Inc. Gary D. Halbert is the president and CEO of ProFutures, Inc. and is the editor of this publication. Information contained herein is taken from sources believed to be reliable but cannot be guaranteed as to its accuracy. Opinions and recommendations herein generally reflect the judgement of Gary D. Halbert (or another named author) and may change at any time without written notice. Market opinions contained herein are intended as general observations and are not intended as specific investment advice. Readers are urged to check with their investment counselors before making any investment decisions. This electronic newsletter does not constitute an offer of sale of any securities. Gary D. Halbert, ProFutures, Inc., and its affiliated companies, its officers, directors and/or employees may or may not have investments in markets or programs mentioned herein. Past results are not necessarily indicative of future results. Reprinting for family or friends is allowed with proper credit. However, republishing (written or electronically) in its entirety or through the use of extensive quotes is prohibited without prior written consent.