Buy and Hold Hypocrisy Essential for Fund Managers to Survive

We all know the mantra espoused by the wealth management industry about the need for us poor dumb investors to buy and hold because there is no way we can time the market. Yet these very people are doing just the opposite with your money, desperately trying to get returns in a falling market to help justify their high fees and charges. This is what I call Buy and Hold Hypocrisy.

Unfortunately you have to be a very good trader or a mug trying to time this market. The usual statistics apply. Probably less than 5% of wealth managers are any good at market timing. Most of them make their money picking winners in rising markets. In a falling or sideways market they have to be much more nimble and that can be hard to do with large amounts of money to trade (Silly me – I mean invest).

It’s also likely that many of the people trading with your nest egg are too young to have experienced a market like the one we have now. They have also been trained to buy dips and believe the market always goes up in the long-teBuying the dips worked until Novemebr 2007rm. Buying dips has worked until November 2007. So they have no fear of the markets made doubly so because they are trading with other people’s money – yours, and you’ve all signed a waiver if they lose all your money that is okay because the market did it, not them.

I’m using the word ‘trading’ because that is what they do to get returns. Trading implies timing the market and that is also what they do. They will churn a funds stocks to get a return. They don’t come to work one morning saying to themselves “I cannot time the market or pick a stock because I have been told this is impossible”. Their intention is to buy a stock that will make money so they can increase the funds under management and get a larger commission. So they use what resources they have to try and stock pick and market time to do this.

If that’s not timing the market or stock picking I don’t know what is.

I just read in the Australian Financial Review yesterday proof of this buy and hold hypocrisy.

“A recent survey of Australian Fund Managers by Russell Investments found they have adopted a cautious view (wow!), with the percentage of them feeling bearish about Australian shares rising to 42% in the latest quarter. They were even more bearish about listed property, with pessimistic views rising from 54% to 65%, and cash was their favorite asset in 50% of cases.”

It goes on to say,

“Many investors may need to steel their nerves, hold their diversifies portfolios and wait for enough encouraging signs to edge back into some stocks.” (Marketing timing me thinks ;-( )

What’s really telling though is two-thirds of the fund managers thought the worst was behind the stock markets. Which planet do they commute from to get to work?

Why are they in cash and what will they do with that cash? Though going into cash is the only sensible thing they have done, you know the answer. Their funds prospectus states they must be invested in the market most of the time . With their short term view too – remember two-thirds of them think the worst is over – have they even looked at a chart lately? They will be stock picking very soon. So maybe we’ll see another pump and dump exercise close to the third quarter of 2008.

They need you to buy and hold so they can do this. If you pulled your money out they would have nothing to trade with. What is worse you may be still pumping money into their funds via your monthly superannuation contributions. In Australia by law 9% of our salary is handed over to the wealth management industry each month. Very few of us even give it a moments thought. Until now fund managers were able to use it to pick more stocks to recover money lost as the market came back and made new highs. But in a falling market that doesn’t work. And since very few will use that money in defensive strategies to protect your money it’s like throwing your money down a well.

In time the stock market will rise again. When it does put in place strategies with your financial adviser to protect your nest egg and forget their buy and hold hypocrisy.

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