When it comes to mutual funds, there is a lot more to success
than just finding a good one. Sad investment stories like the
following are all too common. I hope my sharing it with you
will help you avoid making the same devastating financial
mistake one of my former clients made.
This story begins during the height of the investment madness
in 2000, just prior to the bear market. I had been managing an
IRA account for "Bob" for around six years, with a better than
average record of success. So I was surprised when Bob sheepishly
called in July, 2000 to let me know he was transferring his IRA
account, which had done particularly well during our latest Buy
cycle going into the year 2000.
However, his tax preparer, a long time personal friend of Bob's
wife’s, was now also offering investment services, having
recently received his Registered Representative’s license.
Fast forward to the end of September. It had become increasingly
clear to me that the Bull market had run its course. So, in
accordance with the Sell signal from our trend tracking
methodology, we sold all of our mutual fund positions on
October 13, 2000 and went 100% into money market. (See my
article “How we eluded the Bear in 2000” at
http://www.successful-investment.com/articles12.htm). From our
safe haven we watched the market crash and burn, causing most
other investors to sustain double digit losses eventually
reaching as high as 50 - 60% of their assets.
In 2002 Bob unexpectedly stopped by my office. As it turned out,
things had not gone well at all with his IRA investments. As
most advisors would have done, his tax preparer/advisor had
quickly moved all of Bob’s assets into a variety of “load
funds.”
Of course, being newly licensed he was clueless (as were many
licensed advisors) as to market behavior or analysis of any
kind. The end result was that Bob’s portfolio lost in excess
of 50% over the next 2 years. (Not to gloat, but my clients'
losses in the same period were non-existent.)
Unfortunately, the degree of loss Bob sustained was experienced
by many investors who did not follow a disciplined and methodical
approach.
What I find particularly distasteful is that Bob's tax preparer
misused his position of trust. He made financial decisions that
he was not qualified to make, though his license implied that
he did know enough to make them. So now we know what a piece of
paper is worth.
This is no different than letting a newly graduated medical
student with a fresh MD behind his name perform heart surgery.
Or, hiring a new MBA grad to Chief Financial Officer of a
Fortune 500 company. Yet the financial services industry allows
someone to get a license (after a fairly short course) and to
immediately start making incredibly important and far reaching
financial decisions for anyone he or she can sell their service
to.
This is a worrisome trend in this industry. A CPA friend
confirmed that he has been approached many times by firms
wanting him to offer investment services.
Why? It’s easy money! Accountants and tax professionals have a
great business base. They are in a unique position of trust,
because of the information their clients disclose to them.
Whether they are employed by a company or they maintain an
individual practice, there is probably no other person (other
than your spouse) who knows as many intimate details of your
financial life as your accountant/tax preparer.
To abuse this trust for personal gain—no matter how noble the
motive may appear—is a total conflict of interest and a huge
betrayal.
The bear market of 2000 has shown that investing must be a
disciplined endeavor. Even most professionals have failed to
recognize this. What busy accountant, in the middle of tax
season, can put the necessary time and attention to a volatile
investment market that may require action at a moment's notice?
As for Bob, he’s still with his accountant, and in the same
investments that brought his portfolio down. He’s hoping for
a miracle recovery. As of this writing, the stock market is
engaged in something of an upswing and Bob, I'm sure, is getting
his hopes up that he will recover some of his losses. However, I
shudder to think that this rally may come to an end and the bear
market resumes. Where will Bob be then?
At 58 years old Bob is still playing Russian roulette with his
retirement. He's apparently unable to make a decision to move
to someone who has the ability to make sense of market trends
and the discipline to follow the signals they communicate. This
is a decision that will have a profound affect on his financial
future—and will determine whether his story has a happy or sad
ending.
Copyright 2004, Ulli G. Niemann
Ulli Niemann is an investment advisor and has been writing about objective, methodical approaches to investing for over 10 years. He eluded the bear market of 2000 and has helped countless people make better investment decisions. To find out more about his approach and his FREE Newsletter, please visit:
http://www.successful-investment.com
