The Wall Street has a way of turning your expectations into your worst enemy, according to this extract from the book Rigged Money — Beating Wall Street at Its Own Game
Eeryone has a type, but only Wall Street will take anything with a pulse. My industry spends countless hours and millions of dollars teaching people how to read people. Understanding individuals’ motivations, what makes them happy or sad and fearful or trusting, will allow the practitioner to sell them things.
Unfortunately, this doesn’t always help the people you are trying to serve. Once I made the break from selling things on commission to actually managing money on a discretionary basis, I had to learn how to see people beyond the Wall Street profile. While not an exhaustive study, I want to highlight the people who are most at risk of being led down the wrong path. There is no judgment about these profiles outside of how the industry can misdiagnose certain things we say. The only common theme to tie it all together is the expectation of the people. Wall Street has a way of turning your expectations into your worst enemy.
| Certificate of deposit (CD): Another $3 word to describe a short-term loan to a bank. The bank needs your money for a while so they can lend it and make a spread. You’re bankrolling their profits and the FDIC backs up the bet. Also known as a way to never make any real money. Unlike a short-term Treasury, a CD can’t be traded 24/7 globally. Therefore, before you by a CD over a short term Treasury, make sure you’re not in a hurry to redeem it. It you want to park money, buy a Treasury. You want to trade a six-month Treasury in Shanghai? Done deal. You want to sell a CD from your local credit union in Shanghai? Good luck. |
Is That Really What You Want?
A long-time client referred me to his 88-year-old father-in-law. Normally this is not the typical client profile for my firm. However, he came to me as a referral, and those get top billing, no questions asked. This doesn't mean I don’t ask a lot of questions, despite my confidence that at 88 you know what you are looking for in a financial professional. My job was to figure out what the money was supposed to do for him and what type of risk he was interested in taking-or budgeting, as I call it. He quickly said, “I am an income investor.” To me, that means a person that needs a high rate of income to live off of his portfolio. At this point the average stockbroker would have enough information to start putting together a list of fixed-income securities that are appropriate for a gentleman of that age. Once the box is checked, any movement is frowned upon. Why? Look at it this way, if you change a client’s profile as a broker, you may have done it wrong in the first place or are simply changing it to fit the product being sold that day. You say income, you will get income.
Then I clarified his needs. He said he didn’t plan on taking any money out. The goal was to grow the portfolio faster than a Certificate of Deposit (CD) and be able to get to it if he had any unanticipated needs. Usually at that age it means sudden medical bills.
Whoa! This wasn’t income at all. After talking to him for a while, I realized he wanted a conservative portfolio. This does not mean straight bonds. So if growing in a lower-risk environment was his goal, why did he suggest otherwise? Because the client thought bonds were safe, he took it a step further and simply said income as opposed to growth or capital appreciation. Income in his mind was the byproduct of bonds. I don’t think stocks or bonds are safe, so I asked him about his past investment experience. This would give me an idea of how he sees risk. (DID DAD CALL THE TOP OF THE BOND MARKET)
Here was his explanation. Back in 1982, he purchased several 20-year U.S. Treasury bonds. Why 20 years? He didn’t want to take the risk of 30-year bonds! Wow, now this guy is from a very different generation when it comes to time horizon. It was a different world back then. Half of them he bought at 12.5 percent and the other half at 13 percent. Back then that is what they were going for, just check out the figure*.
Back in 1982, 10-year Treasuries sold for yields as high as 14.5 percent. From there this guy just checked out and collected the income. Beyond the luck of picking the perfect time to invest, he got the luxury of being able to mentally check out for 20 years while collecting a fat yield. Who could have known that for the next 30 years rates would slowly go down in a straight line? In fact, Treasury rates in 2008 started to go below the historic lows from 1962 of 3.95 percent and have been attempting new lows ever since. What I wanted to explain was that he got lucky and was riding a 30-year bull market in bonds and didn’t even know it. He was one step ahead of me. To give him credit, he knew the risks at the time, and never expected to hold the bonds all the way to maturity. Now he was in a different place in life and didn’t have time to bet on anything lasting 20 or 30 years. If only all of my clients knew themselves this well.
What could I do? Just be honest. I told him what I did was simple. The market changes speed faster than at any time in his life and at 88 he was clear on this. Then I pointed out that income, while I knew what he meant by it, wasn’t really what he wanted. Wall Street wants to direct you to bonds as the place to go for security. It is easy to feel secure when the bond markets went up for 30 years, which is 50 percent longer than the epic stock bull market from 1982 to 1999. Then I suggested a conservative risk budget that would include a lot of different things like stocks, bonds, and things that didn’t correlate to the first two. But we would keep adjusting the risk so it remained conservative and low. He loved the idea and in the end he told me this was what he was trying to tell me in the first place.
My point of this story is simple. You can tell a professional what you want. In turn they may simply sell you that specific thing, not the spirit of what was intended. When I was a stockbroker, if someone told me they wanted to make a lot of money, I gave them high risk investments. How can you make a lot without risking a lot? While I was acting within the letter of the law, and made full disclosure of what I was selling (remember that stockbrokers get paid to sell things, not advice) it may not have been what the client was really expecting or what the client really wanted. This works both ways, including being too conservative or dependent on only one asset class in the case of bond portfolios.
RIGGED MONEY
AUTHORS: Lee Munson
PUBLISHER: John Wiley & Sons, Inc.
PRICE: $29.95 (US)
Reprinted by permission of John Wiley & Sons, Inc. Excerpted from Rigged Money.
Copyright 2012 by Lee Munson. All rights reserved.
