The Greatest Risk to Your Investment Portfolio? Surprise! It’s Probably Your Advisor.

February 6, 2008

The other week, a friend of mine sent me an article from a financial advisor in the U.S. asking me for my opinion. In the article, the advisor stated two things that stood out to me like a two-ton boulder falling out of a clear blue sky. They were the following. In response to the short rally that U.S., European and Asian markets were experiencing at the end of January, he stated, “I see this time as a BUYING and repositioning opportunity with great potential gains soon to come”, further clarifying that statement with the exclamation of “It is hard to imagine any time in history when such rampant pessimism about the economy has existed with so little evidence of serious trouble.” When I read those statements, I had to read them again to make sure that I was reading them correctly. I thought to myself, What is this advisor smoking? His comment of there is “so little evidence of serious trouble” must have been drawn after scouring the pages of mainstream newspapers and financial websites that merely spit back what the commercial investment industry wants them to say and after studying government statistics that grossly distort the true picture of economic health. Yes, I know that there are certain asset classes that will rise even in bad, terrible markets. In fact there are those that will rise through the roof in terrible markets. But it was clear from the context of this message that this advisor was speaking of mainstream S&P 500 and Dow 30 type of stocks.

A quick perusal of the last six months of my archives here will tell you exactly why government statistics and mainstream financial media never tell the truth about the health of the global economy. Remember, Jim Cramer, a former Goldman Sachs broker, the founder of the, and host of CNBC’s Mad Money TV show, said, “What’s important when you are in hedge fund mode is to not do anything remotely truthful, because the truth is so against your view”. He claimed that it was easy to plant rumors in newspapers and the medias to drive the prices of stocks down when he had bets on the opposite side, because the SEC didn’t understand what it was he did. Do I really think that Goldman Sachs, a firm with a direct line to the U.S. Treasury (through ex-CEO Hank Paulson) is really dumb enough to believe their own statement at the end of November, 2007 that gold would plummet to the $600-$650 range in 2008 and thus shorting gold was one of their absolute best 10 trades of 2008? Absolutely not. Do I think they were taking advantage of Jim Cramer’s maxim of “not do anything remotely truthful, because the truth is so against your view” to manipulate markets so that they could make more money? Absolutely yes.

So should you ever follow the sentiments, data or statistics reported in the mainstream media without digging MUCH MORE deeply to see exactly how deep the rabbit hole goes? NEVER. If you do, you’ll draw the same conclusions as the above advisor that there is “so little evidence of serious trouble” in the U.S. economy when the evidence is OVERWHELMING, but hidden and simmering hotly beneath the surface. Albert Einstein once said, “After hydrogen, stupidity is the next most common element in the universe.” Smart firms realize this and constantly manipulate the vastly stupid thundering sheep herd to make profits at their expense. Do you know that last year, during the second quarter of 2007, I received an email from a firm stating that this will be the greatest bull market in history and that a 16,000 Dow was very likely by March, 2008? I’m sure the thundering sheep herd digested that email, hook, line and sinker and plunged millions of dollars of cumulative assets into this firm because they didn’t want to look foolish and be left out in the cold during the greatest bull run in history. Although I constantly refer to the investing masses as the “thundering sheep herd”, perhaps I should change that phrase to the “thundering lemming herd” because lemmings are known to blindly follow each other over a cliff to their own death, and that is exactly what the vast majority of investors are doing today.

I read another story from an investment newsletter publishing firm that actually admitted that they market a newsletter that loses money much harder than another newsletter they publish that actually makes money because they have come to realize that the thundering sheep herd is much more comfortable engaging in the same behavior as their neighbors and friends. Though my own investment newsletter’s Model Portfolio is now up 19.68% since our launch 7 ½ mos. ago, and our Currency Portfolio is up an even greater 37% since our launch 5 ½ mos. ago, I GUARANTEE you that I would sell 100 times more subscriptions if I launched a second investment newsletter that was full of nothing but mainstream strategies that every investor was familiar with even if it lost money.

Since stupidity is the next most common element in the universe next to hydrogen, it will ALWAYS be much easier to sell a losing investment newsletter than a winning one because the losing ones contain all the losing strategies that all investors are familiar with, such as : “stay constructive and buy the dips”, “stay invested for the long term because stock markets in the long run always rise” and so on and so on. Thus, the investment newsletter publisher I referred to above admitted that they would continue to push their losing newsletter to thousands of more potential subscribers because they are in the business of making money, not selling good advice, and the losing newsletter SELLS while the winning one does not. To this, I conclude a Gumpian conclusion (as in Forrest Gump), “Stupid is as stupid does.”

So let’s deconstruct some of these incredibly dumb strategies above that are being pushed upon the retail investor, such as “stay constructive and buy the dips”. With the overwhelming evidence of severe economic problems in the U.S. economy that have already spread to major global economies with strong U.S. ties, “buying the dips” is like moving from the galley to the ballroom on the Titanic and thinking that doing so will save your life. It might buy you some extra time, but on a sinking ship, the best thing to do is to get off. And staying out in cash is just as dumb a strategy. You can always make a fortune from crisis if you know what you are doing. As Warren Buffet stated, “the only risk in investing comes from not knowing what you are doing.” I’ve seen many emails and articles over the past month that have urged their investors that have lost significant portions of their investment portfolios not to panic because history has shown that stock markets always rise over time. Thus, they concluded, stay the course, and you will be okay.

DJIA index, 100 yearsThey gain your confidence in these foolish statements by showing you some chart of a major index that covers a 100 year time period that uses monthly averages to cover up volatile periods so the indexes appear to go straight up over history (as an example, look at the chart of the U.S. Dow Jones Industrial Index to the left). These charts, these firms tell you, prove that it’s not necessary to alter any of your current strategies, even if your portfolio is hemorrhaging now. That may very well be the most ridiculously poor advice I have ever heard in my life, next to the statement that diversification is a solid investment strategy. “Don’t panic” is solid advice because no decision should be made under emotional duress. However, as a Navy SEAL martial arts instructor of mine once told me, “If there is a problem, don’t ignore it. Fix it as soon as possible.”

In fact, the stay the course mantra is the same thing these advisors told their clients during 2000-2003 when the S&P in the United States shed close to 50% of its value. Again, forget about the 100-year charts advisors always show you to tell you that you are doing the right thing by staying the course and by staying fully invested in traditional stocks. Precious metal bullion and stocks are two of the very select and few asset classes you should be invested heavily in right now. Unless you are a 30-year old man or woman that plans on living until 130, these 100-year charts have no applicability to your current investment strategy.
S&P500, historical chart

Let’s take a look at the much broader S&P 500 index over the last 8 years (by the way several other indexes of major global markets look very similar to the S&P500 but I am just using the S&P500 for illustrative purposes). The chart to your left is not an inflation-adjusted chart. If it was adjusted for inflation, it would look much much worse. In 8-years of waiting, you are now presently under water, and much more so than the chart to the left indicates. Take into account likely inflation of 6% to 10% a year over the last 8 years (the gross misrepresentation of real inflation rates over the past 15 years in the U.S. is a topic for another day), and the real purchasing power parity of your invested dollars now is WELL BELOW levels from 8 years ago. For example, everything now should be measured against the price of gold. (I’ve heard people say that, despite the housing crisis in the United States, that apartments in New York in prime locations have still appreciated considerably in the past seven years. It would certainly appear that way until you price that apartment in gold. If you did, you would discover that the price of that apartment has actually fallen if it was priced in gold. That’s what I mean by the fact that true rates of inflation are heavily disguised and grossly under reported in the United States.) In any event, back to the S&P 500 chart, that’s a whole lot of waiting for a whole lot of losses.

If you have some silly advisor that is telling you to stay the course because history says that stock markets always go higher, or that this little mini rally is proof that the markets will turnaround by the end of the year, you should be panicking now. Why? Your advisor is beyond a shadow of a doubt, THE GREATEST RISK you have in your portfolio. Common sense says you play the odds and red flags exist everywhere that the U.S. economy is in serious trouble. Perhaps the U.S. Federal Reserve will slash the Fed Funds rate all the way back to 0.75% as they did several years back, but even then, for reasons too numerous to discuss here, slashing interest rates will have a point of diminishing positive returns. So no matter what the Feds decide to do, their options are disastrous. Slash interest rates and threaten to destroy the global economy as they did back in the late 1920’s and early 1930’s, or raise interest rates, and cause deeply in debt Americans a whole lot of pain that the U.S. is not prepared to handle. Either way, the odds say, it will take a miracle to pull the U.S. economy out of disaster and the status quo to perpetuate one. Right now, I wouldn’t place all my chips on the miracle taking place.

Learn more about the imminent global crisis that is now on the way and how to make a fortune from this crisis here.

[tags]global recession, capital preservation, investment strategies, how to manage portfolio risk[/tags]

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