SARINYAPINNGAM/iStockPhoto / Getty Images
The investment industry is plagued with phrases and sales pitches that are either misleading, don’t tell the whole story or are just plain wrong. They’re embedded in regular conversation because they’ve been used so often. It’s said that if you hear something 30 times (let alone 3,000), it must be true.
In the case of the following examples, you need to be alert – though you may never hear the last one uttered by a financial professional.
We’re in uncertain times.
Things are always uncertain, even when everything is going well. The range of potential outcomes doesn’t change, only how prepared investors are for bad news.
This misstatement isn’t all bad. Investors should always be aware of the downside, and yet, when markets are on a roll and there’s “less” uncertainty, risks get swept under the carpet, which can lead to big surprises and bad decisions.
The market is going up because things are good right now.
This statement is wrong on so many levels but let’s focus on two words – “right now.” How companies did in recent quarters has little to do with where stock prices are going in the future. The market processed today’s news long ago and is already focusing on what will be next year’s headlines.
Financial professionals too often use current data to explain future returns. It’s particularly prevalent now when excellent year-to-date corporate earnings offer an easy explanation for why the stock market is on the rise.
Opinion: Do you know what you’re diversifying your portfolio for?
It’s a great time to buy.
Your portfolio is down, but we’re going to take advantage of the dip.
Both statements can be right – it’s usually good to buy when prices are down – but the emphasis on the positive obscures the negative. I see it all the time from equity managers, and it’s becoming more common in the real estate sector. Property managers talk about taking advantage of cheaper prices without explicitly mentioning that higher capitalization rates have also reduced the value of their existing holdings.
The economy is strong (or weak) therefore the stock market is going to be strong (or weak).
The connection between the economy and the market is unpredictable, erratic and beyond most investors’ time frames. Market moves are based on the interaction of myriad factors, many of which are more important than GDP.
Economic chatter gives financial advisers plenty of articles and data to talk about, and clients are easily dazzled by charts and statistics. But even if advisers get the economic forecast right, which is no trivial matter, they then have to predict how stock investors will react, which is impossible.
The fund is underweight technology.
You own a ton of technology stocks, just not as much as a comparable index fund.
Institutional investment managers are focused on market benchmarks. It’s how they’re compensated. If they beat the index, they receive a big bonus, so they measure their exposure to companies and sectors on a relative basis (versus index weightings). Most clients, however, think in absolute terms (I own it or I don’t).
Thus the communication gap. If your manager is underweight Nvidia or the oil sector because they don’t like the outlook, it’s fair to ask why they own it at all. It’s because they’re big weights in the index. The industry’s most overused words are “overweight” and “underweight.”
Don’t worry about what you’re paying. It’s after-fee returns that matter.
The second part of this statement is undeniable. Unfortunately, the first part is an important variable in the calculation.
Fees are one of the things you can control in your investment journey, and numbers don’t lie. Paying an extra one per cent a year reduces a portfolio’s return by 12 to 15 per cent (assuming a long-term return of 6 to 8 per cent). When starting with $500,000, that adds up to $100,000 of lost return after 20 years.
Opinion: Is your financial adviser killing your investment returns?
It’s a semi-liquid fund.
Assume the fund is illiquid and you’re going to own it for a long time. There will be opportunities to exit but only when times are good.
An increasing number of debt and real estate funds are limiting redemptions. These semi-liquid or evergreen funds have hit a rough patch, and more people want out than can be accommodated. There’s now talk that fund sponsors won’t be allowed to use the term semi-liquid.
I don’t know.
If you hear this, you’ve found a rare individual. Investment professionals seldom say they don’t know. They almost always bluster through it or segue into something they do know. It’s an occupational hazard.
Tom Bradley is a portfolio manager with Purpose Investments, co-founder of Steadyhand Investment Management, a member of the Investment Hall of Fame and a champion of timeless investment principles.