Blind Freddie could have told you 24.9 per Cent Returns are Not Sustainable

In an article by Annette Sampson in the Sydney Morning Herald a wealth manager has admitted that after four years of 24.9% returns on the Australian stock market it was not sustainable. (not sure why fund managers only reported a return of 16.7% to their clients 🙁 )

First it’s good to see these guys finally admit the obvious. Despite the title – “Lessons in the carnage” a formal apology from the wealth management industry doesn’t appear to be on the horizon anytime soon.

One financial planner did say in the article, “It would have been wise to sell first and ask questions later. As a traditional long-term investor this isn’t what I’d usually do but is precisely what one should have done over the past year”.

The seeds of doubt in the flawed buy and hold strategy may actually be growing.

I have no quarrel with individual wealth managers or financial planners. The problem is systemic and pervades the wealth management industry. I have used some quotes here to make my points, rather than single out any particular person.

Make no mistake the wealth management industry, stuck in its buy and hold forever rut, has let baby boomers down badly. There should have been an exit strategy for situations outside of their risk models.

They assumed that by following their risk models they would protect your nest egg, but they failed abysmally. Even David Koch an Aussie TV financial commentator  said the other day on one of the financial shows that maybe we should all have panicked when the market was just down 10-20% rather than sit tight as it fell to 50%.

Wealth Manager also sold you on the benefits of using their professional skills and knowledge to invest your nest egg for the long term. They told you they were qualified to advise you and  they know best.

The evidence is to the contrary in this market. They put your money into complex mortgaged backed securities and CDOs through managed funds.

A financial adviser told Annette that, “Products were flogged to unsuspecting investors that were overly complex and inherently unable to deliver on investors’ expectations“.

Individual investors would only have invested in these complex derivatives with professional advice. However the vast majority of investors were put into them via a fund manager or WRAP manager and had no knowledge of it.

So when are the professional money managers going to own up and admit they put their clients money into complex derivatives that they did not understand either?

One of the first rules of investing is,”If you don’t understand an investment you should not be in it”. The second rule promoted wealth managers is you should always seek professional advice when investing. In fact the second rule is enshrined in the law.

I have been fortunate and have navigated this market well and so far so good. I have been lucky enough to avoid the crash so far. I got out I November 2007 because I was not confident the wealth managers knew what they were doing. They had no plan to limit my losses despite my many requests to them on how they would do it. My timing was good luck but I was getting out regardless. My suspicions have been proven correct.

However despite my common sense approach I am not allowed by law to advise anyone on what to invest in even though taking my advice a year ago would have given you a “reverse profit” of 20% or more in your nest egg.

It is interesting to note that had I qualified as a financial planner in 1987 when I was considering it I might have been brain-washed into the buy and hold strategy myself.

Financial planners and wealth managers all over the world have not apologised for losing your money. Many have not bothered to contact ALL their clients to discuss what can be done to limit further losses. My friend is still waiting for his financial planner to respond to his letter sent over a week ago.

In Annette’s article one financial planner implies the investor is at fault. Here is what he said, “.. people kept trying to chase yields. They moved onto higher risk products and were taking risks they didn’t understand”.

The vast majority of money average investors have is in managed funds. The managed funds were the ones chasing higher and higher returns to get more investors funds. It was the fund managers that invested in things they did not understand.

It was the managed funds that did nothing after four years of 24.9% returns. Blind Freddie would have taken profits from equity funds and either kept it in cash or fixed interest, gradually reducing exposure to equities.

One financial planner said, “Investors need to be disciplined about selling and to realise there is an opportunity cost in hanging on the poorly performing investments”. Whoopee! at least one financial planner is seeing there may be a problem with buy and hold in mature bull markets at least.

My response is he should tell that to ALL the fund managers who control most baby boomers nest eggs. Stop blaming the investor (baby boomer) who is relying on his financial adviser and fund manager and often has no direct say in where their money is invested.

In Australia the balanced portfolio is the default fund most people have. Balanced Portfolio is a joke. It can have up to 70% of your money invested in risk-based assets like equities (which have fallen 45%) or property (which has fallen 50% or more).

This is not what I would call balanced.  It’s so wealth managers can put more of your money at risk to make higher returns, so they can reward themselves with higher bonuses.

Your financial adviser should have been taking profits and rebalancing your money more into fixed interest and cash especially after four years of 24.9% returns.

Maybe now they are realising they committed financial suicide by chasing higher and higher returns at the expense of losing 20-30% of your nest egg. Redemption is aptly named as more and more baby boomers redeem what’s left of their nest egg and significantly reducing financial planners incomes.

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