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Advisor Errors

Every weekend there is a new financial plan 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)

• “Dividend All-Stars” is a common column headline enticer. One I saw on August 24 ‘22 listed 20 items (I hesitate to call them securities). The first of their three criteria was a minimum yield 4%. That’s okay. But then things went downhill rapidly. #2. “High probability of sustainable or rising dividend”. Hello! Inside this site, I insist on at least a decade of consecutively rising dividends. In The Investor Investor, Ben Graham wanted 20 years of dividends. It’s your money, you decide. #3 overall positive outlook for the company and/or security price.

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