Advisor Today > > November 2000: Everyone is Getting Rich But Me!

Managing Money: Everyone is Getting Rich But Me!

James P. Ruth, CFP

Remember that people will never come up to you and say,
"I'm losing my shirt in the market!"

Maybe you've just returned from an office party or a backyard barbecue at your neighbor's house. Or worse still, you just got off the telephone with your brother-in-law. In all cases, your reaction is the same: You think, "Everyone is getting rich but me!"

During the last five or seven years, it's been pretty easy to brag to friends, neighbors or anyone else about making big money in the stock market. Just look at the newspapers: This year, despite a sluggish first nine months, three-, five-, and 10-year annualized returns for many mutual funds and major stock indexes boast impressive double-digit records.

And it seems that some investors can hardly keep the good news to themselves. A while ago, a friend told me about his experience with his brother-in-law. My friend said his in-law boasts about all the money he is making in the stock market at every opportunity. He gloats as he makes all of his investment picks sound like a financial sailboat he's riding that just caught the wind. Then he brags about paying for college, buying a vacation home and taking early retirement with his skyrocketing investment returns.

"He always made it sound so easy," my friend added, "and I always felt so inadequate. He's going to retire early and I'll probably have to work into my 60s."

In consoling my friend, I reminded him, "There's a big difference between those big claims of high returns and actually earning them."

Gerald Perritt, editor of The Mutual Fund Letter, puts it this way, "I know of no brother-in-law in the entire world who has ever lost money in the stock market." In short, people will never come up to you and say, "I'm losing my shirt in the market!"

The blowhard brother-in-law, and others like him, fit a familiar profile. They always keep their bad investment picks to themselves. They only talk about their winners, never their losers. Invariably, their big talk is about just one particular stock or mutual fund that has done extremely well, not their entire portfolio. They talk as if everything they own is wrapped up in this one great investment. Conveniently, they don't mention the amount of risk they have taken to achieve this one stellar investment or disclose the rate of return on their entire portfolio. Owning one hot investment doesn't mean the whole portfolio is making money. The damage the blowhard brothers-in-law does is in fostering the misguided belief that investing is a game-that consumers can do it alone, without the help of a professional advisor.

Back in the early 1970s, the average investor held a mutual fund for 16 years. The holding period today is less than seven years and declining. Some day-trading firms even counsel investors to hold stocks for 10 minutes, rather than 10 years. Clearly, investors today, lured by seductive advertising, want to make money more quickly. The key question is, can they? Can consumers beat the market by trying to time purchases and sales? Can an investor jump in and out fairly quickly and do it at a profit after fees, commissions and income taxes?

I believe that the answer for most consumers is "no." Despite the current trend, buying a diversified portfolio of quality stocks, bonds and mutual funds at an opportune time, then waiting 10, 15 or 20 years for the market to go up (as it has historically done), is far safer and more predictable than trying to time market advances and declines.

So what does all this mean? First, it means your neighbor-even if he is your brother-in-law-is probably not doing as well with his entire portfolio as he is with the one stock or mutual fund he's gloating over. Second, it means that timing the market does not work for most people. Third, it mean your best chance for long-term success is with a diversified investment portfolio held for a long time. And finally, it means, "Everyone is not getting rich but you!"

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