INVESTORS FLUNK THE TEST!
FORECASTS & TRENDS E-LETTER
IN THIS ISSUE:
1. Surprising New Investor Survey.
2. Many Investors Are Misinformed.
3. Chasing The Latest “Hot” Returns.
4. Why Investors Don’t Reach Goals.
On December 2, the National Association of Securities Dealers (NASD) released the results of a survey of over 1,000 known investors that was conducted earlier this year. The survey asked some fairly basic, multiple-chooice investment questions, in the hopes of gleaning how knowledgeable most investors are, or are not. The results were quite surprising and suggest the latter. This week, we’ll look at several of the basic questions the NASD asked and the overall responses. You may be surprised at the results.
The NASD surveyed 1,086 people who were known to have made at least one investment recently. The survey was sent to investors whose portfolios ranged from as little as $10,000 up to a maximum of $500,000. Surprisingly (in light of the answers below), over two-thirds of the survey respondents (69%) described themselves as being at least “somewhat knowledgeable” about investing. Only 12% admitted to being “not at all knowledgeable.” With that in mind, let’s look at some of the responses.
First, there was considerable misunderstanding as to the basic types of investments. For example, 60% of respondents said they own stocks, yet 21% of survey respondents did not understand the concept of a stock. While most understood that owning a stock means that you own a piece of the company, here was the real shocker: Almost half of the respondents believed that stocks are insured against losses!
To be fair, the question was somewhat “loaded” in that the survey listed several organizations (SIPC, FDIC, etc.) and asked, “Which of the following organizations insures you against your losses in the stock market?” Again, nearly 50% of the survey respondents thought that their stock market losses were insured! The correct answer was NONE of the above.
Likewise, 70% of the survey respondents did not understand that when one buys stock on “margin,” he or she can lose ALL of the investment, even if the value of the shares does not go to zero. When investors buy stocks on margin, using loans from their brokerage firm and putting up the securities they buy as collateral, they can potentially lose all the money they paid for the stocks, but also the amount they borrowed. Purchases of securities on margin jumped 25% in the first seven months of this year according to the NASD.
Regarding mutual funds, the results weren’t any better. While 60% of respondents said they own mutual funds, 80% did not know the definition of a “no load” mutual fund. The survey also suggested that many investors do not know the difference between loads (sales charges) and normal operating expenses of mutual funds.
So, how about bonds? 29% of respondents did not understand the concept of a bond. 60% did not understand that if interest rates rise, most bonds lose money. Only about half of the respondents knew the definition of a “junk bond.” Almost 70% of the survey respondents did not understand why municipal bonds offer lower pre-tax yields.
Unreasonable Expectations For Returns
The NASD survey asked several questions about what level of long-term returns (performance) was expected. One such question asked, “What is a reasonable average annual return that can be expected from a broadly diversified U.S. stock mutual fund over the long run?” 21% answered that they expected returns of 15-25% annually. Only 40% chose the more reasonable answer of 10%.
Only 51% of the survey respondents knew that stocks have yielded higher average returns than most other investments over long periods of time. Second, a surprisingly large percentage of survey respondents (28%) did not understand that, in general, certain investments which have higher risks have the potential to provide higher returns over time than investments with less risk.
Overall, only 35% of respondents scored a passing grade on the NASD survey. 97% admitted they needed to be better educated about investing.
Finally, the NASD did provide a breakdown on which groups fared best in its survey. The notable findings are: older respondents (50+) did better than younger (21-29) respondents; men did better than women; higher income ($100,000 and greater) did better than lower income (less than $50,000); and primary decision-makers did better than shared decision-makers.
Chasing The “Hot” Funds
In the period from 1984 to 2000, the S&P 500 Index gained 16.3% on average per year; however, the average investor in stock mutual funds gained only 5.3% on average during that same period. Surprised??
The problem is, most investors jumped around from fund to fund during that period, often buying high and selling low. Yes, the investors who bought the average stock funds and/or bond funds, and held them for that entire period, made roughly what the market indexes made: 16.3% on average for stock funds and 11.8% on average for bond funds. But most investors didn’t. Due to bad timing, they didn’t make nearly as much as the average funds. And this was during the greatest bull market in history for stocks!
As noted above, I have thousands of investment clients all across America.
Most are “accredited investors,” meaning that they have net worth of at
least $1,000,000 (not counting their home, autos, etc.). In all these years,
I don't remember a single client telling me that they made most of their
wealth from their investments. No, in most cases, they became wealthy as
a result of their primary business or occupation.
When I say “professional money managers,” I am not referring to your
stockbroker. Specifically, I am talking about Registered Investment
Advisors and professional fund managers. There are successful Investment
Advisors, with proven performance records, that can direct your investments
in stocks, bonds, mutual funds and in other areas.
How Do You Find Them?
If you have read my weekly E-Letters for long, you know that my company – ProFutures Investments – specializes in tracking and monitoring a large number of professional money managers. We continually look for successful Investment Advisors to recommend to our clients. By the way, I invest my own money with every manager we recommend.
You can try to find these top-rated professionals on your own, but it is very expensive to do it right. We spend hundreds of thousands of dollars searching for good money managers all across the country (and even in some foreign countries).
Most (but not all) of the money managers we recommend use mutual funds as their investment vehicle. We have managers who specialize in equity mutual funds, and others who specialize in bond funds of various types.
I happen to favor managers who will occasionally get out of the market, either partially or altogether, if their systems indicate a bearish trend. Yet we also have managers and programs that are fully invested at all times.
Our list of recommended managers ranges from conservative to moderate to aggressive in terms of their investment styles and objectives. We try to match our clients with those managers who best fit their investment goals and risk tolerance.
Think About It Over The Holidays
The overriding theme I have heard from prospective investors this year goes like this: “I lost a bunch of money in the bear market, but I didn’t get back in to catch the huge rise in stocks this year, and now I’m afraid to do anything.”
If you are in this position (or even if you’re not), I would strongly recommend that you consider using professional money managers for at least a part of your investment portfolio. Let them decide when to get back in the markets, and which markets to be in.
This is the time of year when most of us review our investment portfolios. If you are not making the returns you desire, call us at 800-348-3601, and we can help you put the power of professional management in your portfolio. You can also CLICK HERE to visit our website.
Gary D. Halbert
Forecasts & Trends E-Letter is published by ProFutures, Inc. Gary D. Halbert is the president and CEO of ProFutures, Inc. and is the editor of this publication. Information contained herein is taken from sources believed to be reliable but cannot be guaranteed as to its accuracy. Opinions and recommendations herein generally reflect the judgement of Gary D. Halbert (or another named author) and may change at any time without written notice. Market opinions contained herein are intended as general observations and are not intended as specific investment advice. Readers are urged to check with their investment counselors before making any investment decisions. This electronic newsletter does not constitute an offer of sale of any securities. Gary D. Halbert, ProFutures, Inc., and its affiliated companies, its officers, directors and/or employees may or may not have investments in markets or programs mentioned herein. Past results are not necessarily indicative of future results. Reprinting for family or friends is allowed with proper credit. However, republishing (written or electronically) in its entirety or through the use of extensive quotes is prohibited without prior written consent.