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March 25, 2009


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I do think having a financial advisor can be useful -- especially if you're a new investor who is bewildered by all the possible financial vehicles.

A financial advisor can be helpful in helping set up a long-term, low-cost, diversified portfolio and then help you keep to your goals and revise those goals when necessary. That's really it. All this shouldn't take more than 4-6 hours of work per year so if you're paying your advisor a lot of money you're probably not getting you moneys worth. Eventually, after a number of years, if you think you've gotten the hang of it you can start to phase the advisor out until you're not using them at all.

Most of Ramit's point here I agree with (is there a bigger scam than mutual fund managing out there? Well, maybe I shouldn't ask that question), but this:

"there’s no one else to blame if you’re not rich—no advisers, no complicated investment strategy, no “market conditions.”"

When even the big indexes are down 30-40%, um, yes, probably you *can* blame market conditions.

Well, I guess I'm the lone voice of opposition in this blog. I've said this many times in the past. I also strongly believe that stock picking is a useful (and ultimately money losing) endeavor. However, I am a strong advocate of technical analysis and Elliott Wave theory. Of course not everyone can use these tools to get wealthy (as you say, it's simple but not easy). But I have personally used these tools over the past 12 months to do very well.

Oops, what I meant to say was that stockpicking was a useLESS and money losing endeavor. UseLESS not Useful.

I generally agree with this post and definatley find most financial advisors to be useless. Many financial advisors are actually just paid salesman. Often times they were selling shoes, or vacuum cleaners or whatever else they sell in a previous job. They don't have to be any kind of financial expert and many are not. Some are very versed in finances but often even then, they don't have much good advice for you.

I loved the first Ramit post here and was the first to say it but unfortunately he hit one of my hot buttons that sends me through the roof when he mentioned the missing the top 20 or top 40 days of the stock market. I absolutely hate this argument. In financial terms, I consider it the equivalent of "bringing out the Hitler argument." Once you mention this argument of missing the top 20 days of the market you have lost on the merits of the debate regardless of if your other points were valid.

It sounds really good when you say it and thats why so many anti-market timers run to this argument, but it so easy to show how rediculous it is. So in this example if you miss the top 40 best days of the market your return goes from 10% to 1.6%. Think about what this means. That means this market timer got out of the market the day before every one of these 40 best days and back in the next day. This is the best market timer in the history of the world. This scenario is a complete straw man. No market timer would ever behave like this nor could they if they wanted to, because if they could they disprove the theory that you can't time the market. Someone who could perform this poorly clearly did time the market, they just made the exact wrong move instead of the exact right move.

So on its face the idea of missing the top 40 days is really quite silly. But beyond that there is an even more important reason why this is a terrible argument. There are all kinds of market timers and many get in and out around longer time frames. Think about the last 6 months of the market. When you have had the biggest down day in a month or 3-4 big down days in a row, what often happens? It is followed by 2-3 of the biggest up days within a few days or weeks. This also works with big up days followed by big down days. So if this person is moving out of the market because they are timing it, are we supposed to believe that after an 8% up day or 3 days that total a 15% up move they are now going to get back in? No, they are going to stay out and likely there will be a pull back, and they will have missed 1 or 2 of the 40 biggest up days as well as 1 or 2 of the 40 biggest down days and it won't have near the impact that these numbers imply.

It's interesting that when this argument is made you always miss the 40 biggest up days but apparently you get in on all the big down days. So the point is this argument is all for show and bares no relation to what would happen in reality. Under no circumstances would a market timer ever experience anything remotely close to the scenario describe by missing the top 40 up days. And again, if he did, he actually disproves the theory because he is a great timer.

So what is the point. Concerning timing, I think many people think of day traders, hopping in and out of stocks, going for the quick buck, etc. But there are many kinds of timing. There are times when you can make logical choices about things being valued improperly. That doesn't mean that they must return to proper valuations quickly but it does mean that an informed rational person can decide not to play a game that is stacked against him.

For instance, people buying houses that had appreciated 2-3 times in value in 2004-2006. It is not hard to argue that those were unwise choices fueled by a - just do what everyone else is doing mentality. I predicted the demise of the housing market for years before it happened. I knew plenty of people buying rental real estate with negative cash flow because of the appreciation. I told them they were crazy and that this rise was unprecedented in real estate history and it had to correct. They told me I was leaving money on the table and always gave me some argument about houses never dropping in value. I think rational timing analysis says it was not worth the risk. I am now buying rental real estate for 1/2 of what it sold for in 2007. I call that successful timing that you can rationally analize. And if housing just kept going for another 10 years it was still an improper risk reward ratio. The timing said this asset class has surpased its intrinsic value.

I also pulled all of my investments out of the stock market in August of 2006 when the DOW was at 11,500. It went to 14,200 over the next 14 months. I missed some of those 40 biggest up days. I also missed some of the 40 biggest down days. And I never once considered going back in because the P/E ratios were climbing again back to numbers far above historic norms and the economy was hyper inflating on housing and commodity bubbles propped up by debt and it made no sense to me that any of it was real or could last. I started moving some of my money back in at around DOW 9000 and more at 8000 and 7500, but still have a lot out too. I am easing back in as things find their base. I call that analyzing the risk/reward ratio and deciding that if I could get 5% at ING (which I could then) that was better than the chance of 10% in the market when I thought it could potentially go down 25%. And of course it went down more but I make no predictions on that, just that the risk reward ratio wasn't right and now its starting to get more favorable again.

My point is not to prove I can time the market but to say there are times when the risk/reward ratio is skewed and you find it safer not to play in their game until the scales are more balanced. I consider that the kind of timing that is worth analyzing.

Using the argument of missing the best 40 days is unfortunatley a cheap trick argument that misleads people by its powerful numeric results. I think it actually fools a lot of people making the argument into thinking it's a good argument because it looks so powerful. There are good arguments to be made against timing, but the top 40 days argument is definitley not one of them.

Umm, I agree with the general gist of the article. But financial planning, when done right, is essential and important. The important thing is to find the right planner for you. A little knowledge of financial planning and investing doesn't hurt either.

The shorter "I Will Teach You To Be Rich":

"Wanna get rich? Screw the experts! Because all you need is my expertise."

Like Apex shows with great clarity, Mr. Sethi's basic argument against "timing" the markets involves perhaps the ultimate timing of the markets, albeit of a bad sort!

He claims to take apart all these so called "market timers," but he gives no names, mentions no timing strategy other than -- as Apex shows -- a market timing method that gets you out the day before the biggest % daily rallies in history, and gets you buying the moment these one day wonders have run their course!

Mr. Sethi's basic point:

"Unfortunately, we can’t know the best investing days ahead of time. The only long-term solution is to invest regularly, putting as much money as possible into low-cost, diversified funds, even in an economic downturn."

What's curious about this piece of investing acumen is the implicit assumption it makes regarding the "timing" and the "pricing" of the market. In short, his claim is over "time," the stock market invariably rises.

But what if that wasn't always the case? What if, over time, markets decline? The history of capital is filled with instances where markets move lower over time, and often for a long time, before bouncing back, if they bounce at all. Do you think there is some family in the Netherlands sitting on some rare tulip bulb waiting for prices to recover from the great tulip bulb mania of the late 17th century? In the grand scheme of things, is a tulip bulb intrinsically worth less or more than a stock certificate?

Fact is, 98% of all publicly traded companies in the United States have ceased to exist. Under this formula, buying a stock and holding forever is a recipe for insolvency.

But then again, Mr. Sethi advocates purchasing "low cost, diversified funds" -- which are, of course, run by financial experts who get paid big bucks to risk YOUR money -- so problem solved, and irony be damned.

In short, everyone who invests their own money needs to think of markets as unfolding along a price axis AND a temporal axis. Half the battle is figuring out when something is cheap or expensive; the other half is determining WHEN to buy or sell. I'm not saying you can do both, and you will invariably get one or the other wrong. But don't let that discourage you from striving to understand the interplay of price and time in capital markets.


As Apex and James's response make clear, the "buy and hold" strategy of investing has been under attack recently as never before. Rather than serving as a mouthpiece for another personal finance guru's editorial on why "buy and hold is best for the long run," I strongly suggest that you do a SERIOUS and IN-DEPTH investigation of "buy and hold" versus other market strategies over long, long periods of time. I think that will not only be extremely useful for your readers, but may lead to a paradigm shift on how you look at investing.

Dave --

Sounds like you have a passion for this issue. Maybe you'd like to write a serious and in-depth piece on it? If so, contact me and we can discuss.

Financial Planning is absolutely essential, but you don't need any Financial Planner. Everybody need to educate themselves to handle and take care of their own money. If one choose to not to do it themselves, then they cannot complain about their financial planner. It's your money, it's your own responsibility.

I'm curious about M. Brochet and his "study." I'm not a wine expert, but I am a perpetual student of wine and I've never heard of the study. Where can I go to read more?

Skepticism is certainly just with a lot of folks working in the financial services industry. As a Certified Financial Planner TM, I agree that a bunch of vital planning is certainly feasible without having the need to speak with an "expert". Proof that this is evident is watching Suze Orman repeatedly bash moronic callers for asking her advice on whether it's okay to buy that $25k car despite the fact that they don't have an emergency cash reserve much less a job. On the other hand, for those running a fee-for-service practice charging reasonable amounts for their work, I like my odds of constructing a better, non-vanilla financial & investment plan while justifying my cost through actual results vs. a do-it-yourselfer (not to mention having the self-discipline to follow it, modify it, and adhere to it closely) It's a probability game where the odds run in your favor when your knowledge base is wider and confidence to make tough decisions is required using practical applications. Many people knew the market was overheated in 05, 06, 07 yet still didn't have the knowledge or guts to best exit in an appropriate fashion (i.e. usage of covered calls, collars and other tools you can torch yourself with if used incorrectly). The bottom line is it's ridiculous to generalise stock pickers with true planners and even more ridiculous to assume they all operate in the same fashion.

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