Monday, June 18, 2012

My Free Lunch...with *GASP* Morgan Stanley

First and foremost let me lead with this: I do not and will never utilize a financial advisor for any of my investment decisions. For my own personal portfolio I have gathered information from educational sources, researched performance and have done my own homework and am entirely self-managed. But in an effort to educate and be aware of what professional financial advice looks like I said yes to a recent presentation by global investment firm Morgan Stanley to hear their sales pitch. So tucked away during the lunch hour at an upscale restaurant last week in the Loop’s financial district my wife and I, along with about a dozen others sat in for a, “free lunch,” to hear what a professional advising firm had to say about the current market, the resources they offer and offer a brief Q&A for any of our questions related to personal finance. Here’s what I walked away with:

I am weird

A question that relates to a point I will bring up later was presented to the group, indirectly aimed at the technology sector, “Who in here does not own a cell phone?” I looked to my right. Then to my left. And I proceeded to raise my hand with a big stupid grin on my face. I could visibly see that the presenter was caught off guard, (1) that someone would raise their hand and (2) that the person raising their hand was the youngest person in the several decades. I was asked how I was able to pull this feat off and replied to the tune of, “A few years ago I took steps to simplify my life, and ending the cell phone was one of them.” But what I really wanted to say was, “I am weird. I also don’t own a credit card, have not had a car for nine years and have no debt.” But since this was about the information presented, allow me to continue.

Market Trends and Sectors

Morgan Stanley gave their honest assessment of what has been happening on the street since the drop in 2008. Equities have been down and bonds have been up. It was refreshing to see that they proceeded to pull the curtain back on the last 20 years to show that over the last two decades equities have generated far and beyond better returns than bonds.

In a short term view the Morgan Stanley presenter is bullish on the healthcare, financial services and technology sectors. In the last few years these sectors have been at the bottom of the performance scale and over time the presenter expects to see these specific come roaring back within the next few years.

Now when I am evaluation mutual funds I definitely take a look into the sector allocation holdings of the mutual fund. I like to see an even spread across many different sectors personally, but if there is a “comfortable” sized shift towards a sector or two, these are some of the sectors that I have not minded seeing. With a mutual fund that has proven consistent and positive performance over a decade, along with a portfolio manager that has a clue, if the criteria fits and a sector or two are weighted higher by comparison in a given mutual fund, I wouldn’t hesitate to buy.

Client Behavior

My wife asked a brilliant question that leads me to another area I want to explore. She asked, “What has the sentiment among your clients been in the last few years?” The adviser’s answer told me all I need to know about investment advisors at,”sophisticated” companies.

We were informed that fear has flooded the investor in the marketplace. As the downturn in 2008 came and went, clients fled equities and shifted to bonds, most as of the middle of 2012 have kept this bond heavy balance. The advisor educated the group that diversification is key and that over time equities would outperform bonds….DUH!

My problem came with the fact that the adviser did not address the elephant in the room: that traders, investors AND advisors all need Ritalin. It all starts with how you approach investments. I follow a buy and hold rule and only invest in aggressive growth, growth, growth & income and international mutual funds that have generated returns of over 12% since inception, and have been around for at least 10 years.

Advisers, investors and traders don’t think in 5 or 10 year increments. Truth be told they think in 5 or 10 minute increments (and even then that’s generous). When the market shifts downward it seems like the response is to panic and sell equities and buy safety. When the wave comes back those on the safety sideline missed out, this is why many investors have not “recovered” since the fall in 2008. But what does that all mean?

The week of May 9th, 2008 the Dow Jones Industrial Average closed at 12,479.63. At its worst following the ’08 freefall the week of March 2nd 2009 the DJI closed at 6,626.94. Last week, the week of June 11th 2012, the DJI closed at 12,496.38. Just give it time and it always works. Invest in good growth stock mutual funds with proven track records, buy and hold, invest not needing the money for at least five years consistently and over time, and you will see positive returns.

But it seems to me that advisers never sit clients down to explain this. Instead they think they are single stock picking geniuses and bemoan the “simple” investing plan. I came into this friendly meeting with the expectation to not like heavy hitting financial advisers, and the presentation strengthened my point of view. Now I appreciate that the presenter took the approach of an educator and used the meeting to give his honest assessment and field questions, but the pretentiousness nor smuggery could not be hidden. If I were in a one on one with an adviser, after of course confirming through a barrage of questions if we have the same investing philosophies, I would have only one last and important question/statement.

“I believe that broke financial advisers are the equivalent of shop teachers with missing fingers. What is your net worth and how much debt do you have?”

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