Since I first got into the financial service business in the 1980s, I realized over time the financial community, financial advisors and financial writers, have worked very hard to train investors, especially small investors, to lose money in the stock market. The following are some examples, in my estimation, of this training and in one example, poor advice.
- Financial commentators in all types of media outlets often tell investors they make money when markets increase and lose money when markets decrease. The reality is the only time an investor makes or loses money on any investment is when it is sold. During a market decline, which is normal, financial commentators in specific and news outlets in general continually stress to investors they are losing money. This can lead investors, especially small investors, listening and negatively influenced by these commentators, to sell into the decline and actually lose money. This is one reason the "average investor" continually underperforms stock market indexes.
- Many financial advisors teach their clients they are making money when markets are increasing. In good times, advisors review performance reports with clients reflecting gains over the reporting time period. Investors often assume these gains are locked in. The reality is a decline can change performance at any time. A client, reviewing a performance report with negative returns over the reporting period, may now think they are now losing money. This can lead the investor to sell his/her holdings turning a paper decline into a realized one. This is another reason the "average investor" significantly underperforms stock market indexes.
- To entice prospective clients to transfer their accounts, advisors and their firms often review hypothetical past performance graphs and fact sheets. The investor, excited about potential future returns transfers his/her account. Then the markets decline and investors, now reviewing Performance Reports reflecting decreases in market value over the reporting period, believe they are losing money, panic and sell into the decline. Again, this turns a paper loss in a realized loss and again is another reason the "average investor" significantly underperforms stock market indexes.
- Insurance agents and their companies often take advantage of misleading information to first scare investors and then sell them insurance products. Regularly I receive mailers inviting me to dinner to tell me how to avoid losing money in the next market decline. Often these agents are selling low return high commission index annuities. Recently I wrote a blog on Index Annuities which was not favorable towards them. I would suggest index annuities are very profitable for agents and insurance companies, not so much investors.
- Note: I am not saying investors should not be invested in minimal or low-risk investment options. They should and this should also be an ongoing asset allocation and investment criteria discussion between a qualified financial planner and an investor. However, I would suggest there are better low-risk investments than an index annuity including fixed annuities and variable annuities with an allocation in minimal or low-risk options.
When I started in the financial service business, financial advice options for the financial consumer were quite limited. The Certified Financial Planner [CFP®] designation was still relatively new. Today consumers have a variety of financial advice options including engaging with completely independent CFPs® who charge hourly or by retainer. By engaging these types of CFPs®, investors are able to receive unbiased advice and do not have to worry about being encouraged to buy a financial product or transfer assets to a new money manager.