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September 04, 2007

The Wall Street Journal's Disservice to Investors

A couple of people emailed me about the story that appeared on page one of the Tuesday, August 14, 2007 edition of the Wall Street Journal headlined "Over Their Heads: Small Investors, Too, Get Nailed by Arcane Trades." This headline would have been pretty "scary" and confusing to investors with little or no knowledge of options, futures or exchange-traded funds.

 

The article tells the story of various investors who have tried to use short selling, market neutral funds, commodities, and foreign investments to protect their portfolios against declining stock prices. The gist of the article is about how these measures have failed and their investors "burned".

 

Let's look at the sub-text of this article and see how it is great for selling newspapers but sends the absolute wrong message to investors. The article implies:

 

1. It is possible to avoid falling portfolio values when market prices fall.

 

2. We should look at the individual pieces of the portfolio and how they are performing rather than the portfolio as a whole.

 

3. When something goes down in value, sell it; when it goes up, buy it.

 

4. Options and futures are inherently risky, as implied by the heading, "Exotic Instruments" on the chart of optionsXpress' option trading volume.

 

Shame on you Wall Street Journal! This is a blatant case of, "If it bleeds, it leads!" You aren't educating investors with a story like this. These messages are going to cause people to lose money because they got the wrong message from a "reputable" paper like the WSJ.

 

Here is what you should have told us:

 

1. Globalization has lead to increasing linkage between investments. Investments that once moved independent of one another now move in the same direction, at the same time. Trying to avoid losses in portfolio value will inevitably lead to disappointment. Instead, learn how to make your money work, even when portfolio values are falling.

 

2. A portfolio is a group of investments, which when taken as a whole, are designed to achieve the investment objective, over time. There is no such thing as a perfect investment. Hold any investment long enough and there will be times that you hate it. Other times you will love it. What you want to do is have enough performing well, at any one time, to make up for the ones that are performing poorly and as a whole, achieve your objective.

 

3. Buy and sell decisions within your portfolio should have nothing to do with the short-term performance of the individual investments. If the combination of investments are properly matched to your investment objective, risk tolerance and time frame, your investments should only change when one of these parameters change.

 

4. Options and futures are not inherently good or bad, safe or risky. They are just a tool. It is the way people choose to use them that is safe or risky, smart or dumb. When used incorrectly, knives can be dangerous too, but I don't try to cut a side of beef with a spoon! Derivatives are some of the most flexible investment tools available to individual investors. Using them to create cash flow and manage risk is smart. Using them to place a highly leveraged bet on the future direction of wheat is dumb!

 

Unfortunately, most people are taught the dumb way - or know someone who is taught the dumb way. I feel badly for the people in the article but I think it is a symptom of a larger problem. The problem is investors are being driven less and less by sound investment principles and more and more by fear and greed. As someone in the article mentioned, investors often know just enough to shoot themselves in the foot.

 

I believe in self-directing your own investments. Managing your own portfolio reduces cost, eliminates conflict-of interest and puts control over your financial future where it belongs - in your hands. However, this article also points out the value of having an experienced financial coach - someone who can look at what you are doing, see the mistakes you might be making, and give the appropriate guidance.

 

We have taught 3009 investors how to:

 

• Manage their emotions
• Preserve capital
• Get growth even as markets decline
• To generate enough portfolio income to do what they want, when they want, without worrying about market ups and downs.

 

If you have over $25K to invest, register today for our free introductory class, Personal Investing 101: An introduction to cash-flow investing and the Snider Investment Method™.

 

SOURCE:

 

1. Eleanor Laise, et al. "Over Their Heads: Small Investors, Too, Get Nailed by Arcane Trades." Wall Street Journal 14 August 2007; A1

http://online.wsj.com/article/SB118705636964396823.html (Subscription required)

 

 

Kim Snider, Kim Snider Financial Communications, Chronim Investments and/or Snider Advisors make no representation that the information and opinions expressed are accurate, complete or current. The opinions expressed should not be construed as financial, legal, tax, or other advice and are provided for informational purposes only. Call 866-952-0100 to request the Snider Investment Method™ Owner's Manual, which includes a description of the Snider Investment Method, investment objectives, risks, suitability and other information. Please read and consider carefully before investing. All investments are subject to risk including possible loss of principal.

 

Posted by Kim Snider on September 04, 2007 | Permalink

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