Past Performance is No Guarantee of Future Returns

The biggest and most effective marketing “con” ever done has been done on Asset Allocation and Diversification being a way of protecting Baby Boomer Retirement Funds.

Based on a short 20 Year Bull Market, that may not be repeated in the future, the Wealth Industry has managed to put such a great story together about it’s version of the asset allocation model comprising high cost managed funds and pull the wool over your eyes.

They’ve convinced governments too, all over the world that their financial expertise and knowledge can almost guarantee they can provide the pensions that governments want to divest from themselves. It seems Wealth Managers can even do this whilst making extraordinary profits and paying massive bonuses too.

If it is so easy, why don’t governments do it and take the massive profits and spend them for the common good instead of allowing a select few to share these profits?

Except they never forget to put in small print, “past performance is no guarantee of future returns“. It’s often hard to locate and read too.

“The fund companies have no scruples about marketing their dumb luck as if it were insight and skill. They will draw up pretty graphs on glossy paper showing the spectacular returns you would have had if only you’d had the dumb luck to invest in their dumb luck funds at just the right moment.”

How come governments have allowed this con to continue? Isn’t the job of government to protect it’s citizens?

The answer is obviously Yes. But governments are just institutions. It’s the people in government that allow this con to continue. They look for a way out of a problem not for a solution to a problem, most of the time. Pensions are a problem going forward.

Handing over responsibility to private Fund Managers for your pension gets them off the hook if it all goes wrong. They know they cannot guarantee returns, but they can allow the Fund Managers to imply they can by using marketing propaganda and misleading advertising. No prosecutions for them for passing of marketing hype as facts provided they put their little disclaimer in there somewhere.

In an earlier post I showed that a Survey by Mercer had 72% of people in Australian believing their retirement fund would not lose money due to the sub prime initiated stock market slump. So their marketing works.

How do you counter this?

Your Nest Egg should be run as a business. A business would expect each asset to perform. If not they would want to know why and either put in place a plan to fix the problem or get rid of that asset.

Unfortunately Managed Funds don’t work that way with your money. Their buy and hold mentality means sticking to what may not work in future and taking no action to minimize further losses. They avoid the realities of the market. They emphasise overall returns, and give very little detail on the returns of each asset allocation.

Your returns overall may be down 6.7% but they don’t tell you your equity assets (the engine room for future returns) may be down over 20%. Don’t ever forget averaging returns across different asset classes is dangerous and mixing safe assets with risky assets plain stupid, if you are in retirement.

Doing this means you are lulled into a false sense of security and may just accept their word they have everything under control. If they did have control, how come your funds took such a big hit with the credit crunch?

When the credit crunch began did your financial adviser contact you to discuss what would be best for your portfolio because they were concerned about you being in retirement?

Were they concerned that you could not easily replenish your funds from other income and so they should try and protect your nest egg during highly volatile times?

How come the credit crunch affected all asset classes in what they assured you was a “fully diversified properly asset allocated portfolio” designed to protect your nest egg.

  • Property was already in the doldrums. That should have been a warning.
  • Then equities got hit with the financial stocks going down first. That should have stirred them into action.
  • Then good ol’ reliable fixed interest took a tumble when the US dropped interest rates significantly. That’s when they should have apologised to you for destroying your wealth by not taking any action.

Instead they told you that you need to think long term and ignore the fact you may have suffered some serious losses to your nest egg. Wait 5-7 years and all will be well.

What price the Wealth Manager’s abortion of the Asset Allocation model now?

Get with your financial adviser and go through each asset allocation and review its performance. Put plans in place to minimize losses, or exit that allocation if necessary.

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