Buyer Beware Applies to Wall Street

Jan 16, 2012 by

I read with interest last week on another money blog a post and the ensuing comments debate on investment philosophies. Though camouflaged nicely, the writer—a certified financial planner—restated a long-standing financial industry mantra: Buy & Hold is the best strategy. The writer cited a recent “study” done by mutual fund industry behemoth Fidelity. Looking at its own customers’ accounts over October 2008 to June 2011, Fidelity concluded that those who stuck with their investments and continued saving during the U.S. financial meltdown notched higher returns than those who tried to avoid losses by selling or market timing.

What’s Buy & Hold?

The buy & hold strategy reduces to sticking with investments and a saving plan in good times and bad, regardless of pretty much anything. The usual alternative—generically called market timing—subjects the investor to transactions costs and tax bills, and, most importantly, presumes that we flawed, emotionally driven humans can reliably decide when it’s best, financially, to exit and enter an investment market.

Don’t Do as I Do

I’m not going to pretend to know enough to take a defensible side in this debate. For myself, I’ve recognized that when I do try to time a market, I seem to be expert at making the exact wrong move at the perfect time: Selling just when a market bottoms, or buying just when it’s topped. One rather cruel friend actually has asked me to keep him informed when I make such moves, as he has learned that I’m an excellent contrarian indicator and that he can profit from doing the opposite.

My Beef

My complaint is that “studies” done by money management industry insiders like Fidelity—a fine company, by the way—are pitched and seem to be regarded not as marketing, but as serious, independent, academic-style research.

Let’s say Ford published a study concluding that people who buy new cars are more successful than people who don’t. I suspect Ford’s conclusions would be dismissed as self-promotion. But when a money management firm like Fidelity publishes a study—and the conclusions of such studies seem always to advocate investor behavior that, coincidentally, would also benefit the firm’s business—somehow we sheep are supposed to take the conclusions seriously, without even the tiniest grain of salt.

Reality as I See It

Money management is a business—a gargantuan business—just like making cars or selling hamburgers. The reason money management firms like Fidelity exist is to make money by selling investment products. Though I’ll politely (usually) listen, I don’t blindly accept the recommendations of a party trying to sell me something about whether I should buy or how I should behave.

I’m not saying this Fidelity study is flawed; I don’t know anything about it. What I am saying is that I believe Fidelity knows that the more the buy & hold strategy prevails among investors, the better for its business. So I regard its report primarily as self-promotion, not “research.”

Do you accept at face value the investing recommendations of those who make money selling investments?

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