Advisor Errors

Every weekend there is a new financial plan/financial facelift in the press. The planning portion is usually fine; the investing part is maladroit. The so-called experts are infected by modern portfolio theory. Here are some examples.

  • “As they move into retirement”, the adviser said, “they will need to reduce their volatility risk…” What’s volatility? In industry parlance, it’s falling stock prices. They want you to buy more bonds, for protection, these ‘people’ maintain. But bonds are volatile also. And buying bonds when interest rates are rising is down right unwise to the nines. My favourite definition of volatility is “what happens when we’re were taken by surprise”. Volatility is investors changing their minds about the future more quickly. In a retirement portfolio, generally, you are holding fine individual companies with growing dividends. In the long run, these grow to be safer than bonds. (Aug 19 ‘22 RoB)
  • 0.39% is the income provided by the mutual fund she (now age 68) was sold (not even 1%). Funds are NOT noted for the income they produce. She will have to eat into capital to survive retirement. The planner she has now suggested a more income oriented portfolio. This example gets at the fatal flaw of asset management by professionals. There are really only two options offered by the industry: growth or income. The income portfolio offered, however, does not eliminate her problem. Typically, it contains preferreds and bonds. You want growing income. Growing dividends drives capital growth. You must get both. RoB, Oct29’22 “Can Luna, 68, retire next year and keep her home . . . “

June 8 2024 - Here’s another example of the most common mistake advisors make: they fail to realize, that with dividend growth, yields grow. Before the advisor pounced on them, the couple had an excellent portfolio with 17 individual stocks and 25% of their investments in money market funds. Their return, the advisor said, was 5% over the last five years. ♣ Dear advisor: but their yield, being stocks, would have grown over those years. The advisor stupidly recommended selling the stocks, losing the enhanced and growing income stream and for more [unneeded] diversification (17 fine companies is plenty) be sold and replaced by ETFs. ♣ Dear advisor most funds run by professionals and do not beat the market. There are columns inside this site about why professional do not do well. This growing yield point is most important. Read Henry Mah’s work. You will be many tens of thousands richer if you invest in individual companies yourself. After ten or 15 years your return will be double digit from dividend alone.

  • “Dividend All-Stars” is a common column headline enticer. One I saw on August 24 ‘22 in the RoB listed 20 items (I hesitate to call them securities). The first of this bank’s three criteria was a minimum yield 4%. That’s okay. But then their investment concepts went downhill rapidly. No.#2 was: “High probability of sustainable or rising dividend”. Hello! Inside this site, I insist on at least a decade of consecutively rising dividends. In The Intelligent Investor, Ben Graham wanted 20 years of consecutive dividends. Inside we have dividend data going back decades organized in decade long, overlapping periods. It’s your money, you have to decide what the safety standard is for you. Cash flow drives everything. No.#3: “overall positive outlook for the company and/or security price”. Forecast the price? Hello again. How? ♣ So, what are these rascals about? High yields. More money is lost reaching for yields than from robbery and theft. Returns, though, involve growth (R=Y+G). Sixteen of the 20 in this list had yields at 5% or 6%. High yields alone do NOT build wealth. I’m a dividend growth investor, not a dividend investor. The difference is tens of thousands of dollars a year, even on small portfolios.
  • Wealth manager’s fatal error → Observe the first word in the paragraph just above: dividend. It’s not dividends that build your portfolio. It’s dividend growth. You want your income in retirement to grow. Right? Grow your yields. High yields are a false start. Capital growth is driven by increasing cash flow. Think. If the cash flow from a company grows over time, the company is worth more. Therefore the stock price rises. It’s as simple as that. Price growth tracks income growth (many scores of examples inside). ♣ But it takes time, my friend. Most folks don’t have the patience. ♦ Believe that, in the long run, return on equities track their initial yield and its growth. Learn more about this inside ♦ Most of our own yields (Louise and the sister and I) are double digit now. One, BNS bought in 1990, is over 100% (triple digit). We get our initial investment back every year. I do not own bonds. Never did. Never will. Good stocks, with time, become safer. Indeed: safer than bonds.

Bonds exhibit inhibitory activity on portfolio growth. Inside the September 2022 blog highlights research on how predictable equity returns are. Very, over a decade, give or take. Connolly Report data is decades long. We have the evidence.

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advisers_err.txt · Last modified: 2024/06/11 20:22 by tom
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