The Great No-Help Lie
"The Great No-Help Lie is that you can pick superior performing mutual funds by yourself without paying for an advisor." -- Nick Murray
Nick goes on to say that real people do not get investment returns, they get investor returns.
The "Great No-Help Lie" likely refers to the popular press whose linear, cognitive dissonant thinking claims that buying the superior track record or at the cheapest cost is the key to successful investing.
That argument is seductive but a lie nonetheless. The truth is, investor returns are almost always lower, usually dramatically lower than the investment itself.
How is this so? When the so-called superior track record lags (as it invariably will), the investors who are left to themselves (or worse, left to the press), will simply sell the fund. The fund will go into liquidation as investors receive their quarterly or yearly negative performance results. Add a major financial event - a recession, financial crisis or the latest apocalypse dejour – and the fund, index, ETF, etc. goes into panic liquidation.
To illustrate what I mean, here is a straightforward chart for your review:
The chart consists of a major U.S. stock market index (S&P 500 Index) along with money flows in and out of stocks and bonds.
http://www.franklintempleton.ca/
First, some explanations: Equity funds refer to mutual funds containing stocks, and bond funds, logically enough, are mutual funds containing bonds.
The jagged line represents the value of the stock market index (based on a $10,000 investment) and the solid green areas represent money going in or out of stocks. The solid gray area represents money going in or out of bonds.
There is a couple striking things about this chart. Note the massive inflow into equity (stock) mutual funds around the year 2000 or just before. Note the massive outflow of money out of equity funds in 2009, 2011 and 2012.
Initially, this looks very puzzling. Why would money be exiting equity (stock) mutual funds at the same time the stock market index (S&P 500) was soaring? Shouldn't money be going into stocks? Logically speaking - yes it should, but logic has nothing to do with it. Instead, the money continued to exit stocks and went into bonds. However, that is another discussion for another time.
By the end of 2012, the S&P 500 stock index had more than doubled from the lows reached in 2009. Currently, at the time of writing, the S&P 500 is some 152% higher than the 2009 low.
If you look at the chart, the majority of investors bought stocks at the peak of what was the technology/internet mania of 2000 and again, a majority of investors sold their stocks from 2009 (the U.S. Financial Crisis) onwards.
According to the chart, in dollar terms, investors paid almost $60,000 in the late 1990's, and sold the investments in 2009 - 10 or more years later - in the high $30,000 area. We'll call it a loss of about one-third of the investment in 10 years.
A good investment adviser knows that picking an investment out of the newspaper with a "superior" track record is a fallacy and an unattainable target. The superior track record of the S&P 500 stock index just earned you a 33% loss in a 10-year period. Buying or selling at inopportune times will destroy the so-called superior track record every time.
What we do with our investment after we've bought it is the true key to investment success. Advisers who understand behavioral economics can help mitigate these inappropriate and deadly investment behaviors. And as Nick pointed out many years ago:
"We see that investment success is not primarily determined by investment performance but by investor behavior."
If you are reading the above sentence, please do re-read it. You should be having an "ah-ha" moment right now.
Be warned though. The Great No-Help Lie is always around us, re-phrased slightly here or there by the media but just don't believe it. Not even for a second.
