Working with a Broker
Brokers and advisors some times try to persuade you that their technical analysis is akin to having a crystal ball. Unfortunately, charts tell you nothing about the future. Of course, even the most mindless of technical analyses will work sometimes and even for a short while due to sheer luck. The most basic of these systems include moving averages and mean reversion, which happen to be popular with brokers and some advisors. You might as well make your next investment decision by throwing a dart at a board.
If not with technical analysis, then what about relying on fundamentals to make investment decisions? Because markets are
so efficient, fundamentals are already “priced in,” as are expectations about the fundamentals. Notice how quickly the markets react to the latest economic indicators as soon as they are released (like GDP, the unemployment figures and the
Fed funds rate announcements). Even a good result (e.g., the economy added 200,000 jobs) can lead to a downturn in the markets because it wasn’t as good as what the market participants expected. Unfortunately, fundamentals turn out to be useless indicators for market predictions.
The next time that your broker or advisor tries to impress you with a chart or a spiel about market conditions to explain the basis for their trading advice, remember that it’ll be tomorrow’s news and information that will drive the markets, not what happened today or yesterday. Without a crystal ball, your advisor is simply guessing in order to inflate their value or to justify their fees or commissions while you take all of the risk.
Professional traders use the latest in technology, co-located servers and real-time news aggregation services and rely on
powerful automated strategies to compete in the milli- and microsecond high-frequency space. By some estimates, more than
90% of these professional traders can’t sustain a career*. Turnover is high. What makes you so sure that it is your broker/
advisor is that special one who can not only outwit the professional traders in the short run, but can also consistently beat the markets over longer time frames? Your odds are not very good.
What about paying financial professionals a premium for access to superior strategies? The only thing that higher costs guarantee is that more wealth will trickle up from your account to the pockets of your broker/advisor. Be wary of commissions, sales loads, high expense ratios, unreasonable AUM fees, frequent trading or high portfolio turnover, account maintenance fees, operating expenses, 12B-1 fees and other fees, some of which will be hidden. Minimizing your costs should be one of your main goals. It’s one of the few things that you can control when you invest.
Unfortunately, the financial industry continues to be entrenched with high costs and speculation gimmicks. If that’s the case, is there any good news?Actually, all of this turns out to be awesome news for every investor, regardless of age, income, wealth, or investment experience.
To improve your odds of investment success, shift your focus to the longer term. Invest (rather than speculate), embrace the markets (let them work for you, rather than trying to beat or outwit them) and minimize costs (keep more of your returns). You’ll no longer be anxious or confused about the current financial headlines. You won’t need to stress about chasing performance. And, you’ll avoid paying a broker/advisor a premium for their supposed trading skill (since the overwhelming likelihood is that they don’t have any).
