Please Ignore This Advice

by Jason Unger

Remember how most fund managers can’t offer you anything except lower returns and higher fees?

Well, in response to the economy, more fund managers are beginning to actively manage their clients’ accounts — and abandon the tried-and-true strategy of buy-and-hold.

From the Wall Street Journal – Advisers Ditch ‘Buy and Hold’ For New Tactics (via Louis):

Buffeted by steep declines in stocks, many bonds, commodities and real estate, many advisers are questioning their faith in long-standing investment principles, such as controlling risk by building diverse portfolios. Some are adding increasingly exotic investments, including products that offer downside protection, to client portfolios. Others are trading more actively — and say they plan to continue to do so until they see evidence of a new bull market.

The pile of evidence against this idea is huge.

If you had all of your investments in cash, you’d have missed the 23% jump in the market since early March.

If you’re actively managing your investments, you’re incurring more trading fees — and your manager is pocketing more of your money.

Obviously, these managers are listening to Jim Cramer. Unfortunately, it doesn’t seem like they know his stock picks routinely underperform the market.

Generally, this discussion boils down to one operating theory: should you change your game plan in response to the economy? When the stock market is down, should you try and time it? Or should you continue your investing strategy?

Baker at Man vs. Debt has a great recap of this, pitting stalwart Dave Ramsey vs. changeable Suze Orman.

Ultimately, most of us realize a nice foundation of time-tested principles is essential to long-term success. However, this doesn’t mean we have to ignore a new set of circumstances when they are presented. The ultimate answer may lie in doing our best to process and form opinions on new information, while still double-checking any changes we may want to make against the principles of our core beliefs.

Nine out of ten times, when you decide to make a change to your strategy, it’s already too late. You’ve already felt the big market drop. You don’t have enough time to build up that huge emergency fund (as Orman now advocates).

When it comes to your investing strategy, set it and stick with it. And when someone tells you to change, look long and hard at the reasons why.

If your fund manager tells you to ditch buy and hold, please ignore this advice.

About the author: Jason is the author of Automatic Finances: 17 Days to Your Financial Freedom, a guide to automated money management. He started investing thanks to a free lunch, and after finding out how he was getting the short end of the stick, he sought out how to do it right. More »

{ 1 comment… read it below or add one }

David Stillwagon May 5, 2009 at 10:38 pm

I learned my lesson a long time ago when I sold a stock on panicky news only to watch it grow and grow months later.
Good post.
David

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