Bear with me while I preach to the choir a bit…
Small retail investors are being beat to a pulp yet again.
The concerns over fiscal policy and our economy have taken a massive chunk out of year-to-date investment returns. At the same time, we could be looking at a hike in taxes on the paltry returns individual investors are managing to pull out of the markets…
If you have even had the fortitude to open up your 401(k) disclosures, you’re seeing the heart of the problem.
The classic “buy and hold” strategies that have been sold to all of us through retirement plans and by brokers and every other player with a stake in the rigged system are dead.
But what you may not be aware of is some groundbreaking research that proves this classic strategy is flawed…
Robert Shiller is an American economist and best-selling author, and currently the Arthur M. Okun Professor of Economics at Yale University. His book Irrational Exuberance was published in 1981 to little fanfare. A second version was republished a couple years ago.
By the time the original version was published, the big brokerages and investors latched on to the “buy and hold” strategy for smaller investors, and it was the only brand of advice available…
While large clients were privy to more active management and expert advice, individual investors were being used to pad returns.
For years, an entire industry has worked to keep small investors fully invested in the stock market at all times — no matter how high stocks climbed.
The concept is pretty simple in its ruthlessness: While small investors rarely react quickly enough through their brokers to limit losses during a downturn, the increased investment in equities allows the big boys to get out before everyone else. At the same time, brokerages have much large account balances to work with as a whole, which limits overall risk and allows larger positions for more aggressive and exotic star traders.
It’s a win-win scenario for the players that actually matter in the eyes of large financial institutions.
The core of Shiller’s work was based on overvaluation in the markets.
He used the “Cyclically-Adjusted Price-to-Earnings Ratio,” now also known as “the Shiller PE.” This compares stock prices with after-tax company earnings after adjusting those earnings to take into account the fluctuations of the economic cycle.
The goal is to avoid the distortions commonly found when you compare stock prices to a single year’s earnings. At the peak of a boom, earnings are artificially inflated, while at the trough they are artificially depressed.
The Shiller PE smooths out the peaks and troughs and presents reasonably accurate long-term data.
Take a look at where we are now:
Considering the historical average for the Shiller PE ratio is around 20.6, we’re currently just over the average — but a long way from the historical lows.
Another aspect of the chart that should be blatantly obvious is the massive exponential swing from 1981 through 2000.
This is what years of “buy and hold” investment advice did to the market.
The constant effort by financial institutions to get small investors to buy and hold paid off. No matter what happened in our economy, they kept pushing to keep people invested.
Before the markets crashed, they were overvalued by about $12 trillion. There was only one direction for the market to go in the long run — yet financial experts were happy to throw individual investors under the buss to squeeze out a little more in profits before the inevitable correction.
A professor at the IESE Business School at the University of Navarra in Spain, Javier Estrada conducted several long-term studies years ago and found an interesting effect that clearly bolsters Shiller’s data…
Over an investing period of about 40 years, missing the 10 best days would have cost you about 50% of your capital gains.
However, an investor that successfully avoiding the 10 worst days would have 250% more in capital gains than someone who simply stayed in all the time.
This goes to show that anyone advocating a buy and hold strategy is only doing half the work — and dramatically limiting potential gains for their clients.
Of course, there are plenty of good brokers and financial advisors out there looking out for their clients’ best interests. My intention is not to paint all investment advisors with the same crooked brush.
But the only real way to be sure the advice you’re receiving is impartial — and not designed for a brokerage firm’s bottom line — is to remove the profit incentive for others from trades.
That said, one of the best aspects of working for a financial research publishing company like Angel Publishing is that our success isn’t measured by manipulating investors. It is measured by our readers’ success with our research — and our ability to continue to satisfy them with the quality of our research.
Our editors have free rein to make the impartial buy and sell calls needed to maximize potential gains.
Odds are your broker or brokerage hasn’t delivered a 17.3% return from closed positions like our own Nick Hodge has in 2012…
Nick is gearing up for a big finish this year. And in fact, his latest profit opportunity has nothing to do with stocks. Even better, there’s no limit on how many times — or how often — you can exploit this secret for huge gains. You can do it as often and as quickly as you wish.
For Your Prosperity,
Adam English
for Wealth Daily
P.S. With the markets and our office closed for the holiday, we will not be publishing a new Wealth Daily article Thursday. We will be back in action Friday with new insight from Nick Hodge. On behalf of all of us here at Angel Publishing, have a happy Thanksgiving!
