April 1st isn't the only day the investment industry plays nasty tricks on you. Here are a few that I think are so nasty they should be illegal.
- Death by Disclosure - Have you ever been handed a 273 page disclosure document? You know the sort of intimidating document, the kind where the critical information is buried deeper than King Tut's tomb. Information on costs can clearly be calculated by taking the information on pages 63, 127, and 248. Or maybe not so clearly since no one but an actuary and an attorney working together could actually understand it. Disclosure should be in English with the most important points summarized in the first page.
- Misleading Benchmarking - Last year, your US stocks earned 14.0 percent while the S&P 500 returned only 12.54%. Such trickery is employed to make it appear that your manager beat the stock market. But as I've written ad nauseam, the S&P 500 index is only the largest 500 US stocks and carves out the return that comes from dividends. The total return of the total US stock market last year was 17.76 percent. That 14.0 percent return your money manager touted, actually underperformed the stock market by 3.76 percentage points.
- False Promises - I recently heard on the radio that you can get a guaranteed eight percent return, compounded annually. The infomercial went on to say that you don't have to give up returns for risk. I'm still trying to get this firm to take a hundred grand from me. I'll write about this soon.
These tricks, as well as many others, have been around for a long time and exist for two reasons.
- The investment community has learned how to masterfully use fear and greed against you to separate you from your money.
- Regulators look the other way. If firms can make claims like a guaranteed eight percent return on the radio, do you think they really are concerned about regulators?
I suggest you use some uncommon common sense before you hand over your hard earned money to someone else.
- Do you think the lawyers and actuaries write these long disclosure documents to protect you, or themselves and their firm? Why do you think they want your signature saying you've read and understood this document?
- Is the benchmark your money manager is using to compare their performance to self-serving? Can every investment professional really be above average?
- If investment guarantees were really solid, would they need to be sold? Don't you think institutional money would flow into a guaranteed eight percent minimum return?