Investor Advisors: Buy High, Sell Low

Jason Zweig has an interesting piece in the Saturday WSJ about the bad advice investment advisors give:

“Investment professionals are supposed to exercise independent judgment; in Warren Buffett’s words, they should be fearful when others are greedy and be greedy only when others are fearful.

It doesn’t always work that way. Corporate pension funds had 69% of their assets in stocks in 2007 as the market hovered at record highs. They have slashed that exposure to 45%, as my colleague E.S. Browning recently reported.

Advisers, too, have been buying higher and selling lower. Those who use TD Ameritrade had an average of 26% of clients’ assets in bonds and cash on Oct. 9, 2007, the day the Dow Jones Industrial Average hit its all-time high of 14164.53. By March 9, 2009, the day the Dow scraped rock bottom at 6440.08, the advisers had jacked up bonds and cash to 51%.”

The simple explanation is that advisors (or at least the bulk of them) are reacting emotionally to market swings. They are over-confident after markets have had big moves up, so that’s when they buy; they dump equity shares in a panic late in a down turn.

Yes, yes, Human primates are emotional creatures, especially in crowds; we are aware of this fact. Given that is a known variable, the more interesting question becomes why is this the case.

I can make 3 guesses:

1. The fee-based industry maxes out revenue by maintaining a fully invested, long only posture.

2. Advisors receive little in the way of training when it comes to asset allocation and portfolio management.

3. Risk Management and Capital Preservation is often confused with Market Timing, and therefore is frowned upon.

This brings me back to one of the very first things I ever published about investing: Its your money and your responsibility. (TBP mirror) Neither the Fed Chief, nor your advisor nor any guru nor blogger nor Jim Cramer. You are the one who is going to be either going to live in comfortable retirement, or eating cat food tacos.


Have You Herd? Your Adviser Is Scared to Set You Straight
Jason Zweig
WSJ, OCTOBER 30, 2010

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