Crisis tends to bring out the best in people, but it also brings out the worst. The same is true with any industry. When times are tough you see the best and worst that industry has to offer.
In the current credit crisis, economic downturn and Wall Street collapse, the financial sector is front and center. With that spotlight we are seeing both the good and the bad of what is a key component of U.S. style capitalism.
While much of the outrage has been rightly focused on institutions that participated in the mortgage securities market that then required massive government bailouts to avoid failure, I am taking a more critical look at those institutions that deal directly with the individual investor.
Specifically, my own outrage has been on the broker/advisor that failed in their fiduciary duty. How so? By missing the key signs of impending disaster, the broker/advisor should have been significantly reducing exposure to over-valued stocks.
To the extent they did not, they failed. That fact is a black eye for an already damaged industry.
The reasons given for the dereliction of duty reside in the bogus buy and hold, never sell mentality of the broker/advisor community. There is a very good reason for this. In many cases compensation to the broker/advisor is directly tied to assets invested in the market.
If those assets are sold or moved to cash, the broker/advisor does not get paid. That is a significant conflict of interest if you ask me and they get away with it because buying and holding stocks has just enough plausible reasonableness.
That is until there is a crisis. Then the buy and hold approach collapses like a house of cards. The current crisis qualifies in that regard.
When credible professionals suggest that the situation was near apocalypse and subsequently state that the crisis is the worst since the Great Depression, the claxon bell to action sounded loudly.
Losses in stocks were entirely avoidable, but oh well. Buy and hold baby. You surely don’t want to miss out on the big gains in the market by sitting on the sidelines when stocks go up in value, correct?
After all missing the markets biggest up days is the most important argument of the buy and hold crowd. The claim suggests that most portfolios obtain their returns on the days when the market moves the most.
Again, this is an entirely plausible argument, but the thesis is a little bit of smoke and mirrors if you ask me.
I have news for you. My Rational Investor model portfolio was moved to 75% cash at the end of September. Last Friday I reduced that to 65%. Essentially I am sitting on the sidelines.
Guess what? During October we saw stocks two of the largest one day point gains in market history. We had the 800 plus point Dow move yesterday and in the middle of the month we had a 777 point gain on the Dow.
These are exactly the type of moves that the buy and hold advocates will tell you not to miss by not being invested. Oh really?
My model portfolio missed these monster days and yet that portfolio is outperforming the major indexes by a huge margin. Year to date the portfolio is down only 2.5%. Even better, I am sitting on cash that can now be deployed in a market that is forming a bottom.
Am I disappointed that I missed a huge rally by sitting on the sidelines. Hardly. I am much more interested in winning the war, not the battle.
I am in no hurry to deploy capital even at the expense of missing huge gains in the market. I am very confident that I can continue to do so using what I call a modified buy and hold strategy.
It is true that now is not the time to panic. In that regard your broker/advisor is dead on correct. You should not be selling positions today in fear. If you missed the boat at the end of September, it is too late to sell.
What you should be doing though is finding an advisor that does not preach the same old buy and hold speech that is now institutionalized. Find the broker/advisor that will manage your account.
There is a reason it is called money management. Those broker/advisors that are still pushing the same old same old give the industry a black eye. You deserve better.
Do it yourself with the tools here at InvestorPlace or find a competent replacement.
This article was written by Jamie Dlugosch, contributor to InvestorPlace.com. For more actionable insight like this, go to: www.InvestorPlace.com and check out:
