Anne Tergesen and Jane J. Kim had an interesting article on the Wall Street Journal “Advisers Ditch ‘Buy and Hold’ For New Tactics”, as I read the article I could only hope that investors with these adviser’s have learned from the past and fire them. Changing investment strategies for emotional reasons is a recipe for disaster. I have written about Buy and Hold investment previously and believe it still is the best way to go for the average investor, if your strategy has been buy and hold you should stick with it.

There has been a great amount of pressure on advisers from their clients, clients want to see results and are tired of seeing red on their statements. These are the times when advisers are needed the most, 80% of advisers job is to educate the client and help them through the emotional roller coaster. If the advisers abandon their investment strategy and their client’s financial plan due to emotions I can only hope the client runs away from the adviser.

The article points out that some advisers are looking for “alternative” strategies for their clients, this too frightens me. Warren Buffet has over and over stressed not to invest in things you do not understand and this should be a golden rule for all investors! If your adviser wants you to invest in a “great undiscovered investment”, again I say run, run faster. One of the major causes of the financial breakdown was investing in untested investment vehicles while not fully understanding them. If you do not understand it don’t invest in it. New investment vehicles are continually being constructed and sold to retail investors through their advisers, often the advisers are paid bonuses for pushing these products and too often they do not understand the investment and the dangerous associated with them. When investors get involved emotionally in their investments this opens the door for brokers to sell these investments as “alternative” strategies, taking advantage of the client’s emotions.

Always remember the rule: If you don’t understand it, don’t invest in it.

Almost all “alternative” investment strategies come at an extra cost and usually more risk, I don’t understand how higher costs and more risk can help the average investor.

Some Added Costs

More frequent trading will result in hefty trading costs, this is a definitely a good thing but for the adviser.

More Taxes– If the adviser somehow manages to pick winners every time you will end up with a bigger tax bill again a good thing but for the Revenue agency. Some will argue they would rather have a larger tax bill than losses on their investments, this would be OK if only your adviser could time the market which he more than likely cant. The chance of having meaningful profits diminishes quickly when investors take into account the excess trading costs and taxes.

There is not enough reward for the risk.

If your advisor is unable to give you emotional support during these rough times and takes advantage of your situation by recommending “alternative strategies” fire them and find someone else. Keep your emotions out of your investments; keep your investments from your advisor.

Ray

Ray

Ray is an ex-financial adviser and the founder of Financial Highway. Currently working in the financial industry and working towards completing his Chartered Financial Analyst, CFA, designation.