Monday, May 18, 2009

Market Pullbacks Lead To "Madness"

A major nationwide broker/dealer is currently running a television ad that I find shocking. In the ad, an animated character says "before, I was happy to just let my 401(k) sit there and do its thing. Now, that just seems like madness." I think this ad is a perfect example of how out-of-whack emotions can get during times of market volatility, and just importantly, how the financial industry is more than willing to capitalize on the public's financial insecurities.

Remember, a 401(k) is a retirement (i.e. long-term) investment account. The ad seems to imply that a "buy and hold" strategy is no longer effective with 401(k)s, and that people should be making short-term transactions in these accounts. First, if retirement is more than seven years away, what the market does today is next to irrelevant. There is plenty of time for your 401(k) to recover from the 2008 decline. Second, there is a reason why most 401(k) plans limit the frequency of participant transactions. There was a time when these restrictions were not in place, and most individuals who actively traded their retirement accounts lost their shirts.

I don't blame casual investors who are not in the profession of personal finance to be confused about how to handle their investments. However, it is times like these where financial planners earn their fees and add the most value. Our clients hire us to be the voice of reason during hectic times. We have 100 years of history suggesting that over time, the market will increase in value by about 10 percent per year. I find it ridiculous to throw out that evidence because of a rough 15 month period.

Unfortunately, I think the ad illustrates that many in the financial planning industry are willing to capitalize on investor's fears to make a profit. Many in the industry are now touting nontraditional methods of investing because they realize the average investor is still feeling the sting of the market pullback. There is a reason these investment approaches are nontraditional: they are not historically effective. I believe investors who chase returns utilizing these nontraditional approaches will be stung again soon. At that point, those individuals will again be targeted by the same firms that are pursuing them now, only then, those firms will be advising them to "buy and hold."

Changing retirement planning strategies every time this pendulum swings is "madness." Find an independent financial advisor who will help you resist the temptation to chase this revolving door of investment approaches, and stick to the tried and true principles of long-term investing.

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