Know Your Enemy: Part II

Written By Briton Ryle

Posted February 9, 2015

Last week, I wrote about the fiduciary standard and how individual investors need to be aware that their investment brokers may not have their best interests at heart when they recommend investments. 

This is a serious issue, especially when it comes to retirement accounts. For instance, if you roll an employer-sponsored 401(k) plan into a self-directed IRA or even a managed IRA, the person offering you advice on what investments to include in the account may simply be a broker who is not acting as a fiduciary. 

I received several letters from Wealth Daily readers on this topic, and I wanted to share them with you today…

Karl wrote:

I appreciate your sentiments in your column “Know Your Enemy” and agree almost completely. I do wish that you might have mentioned that there are some financial advisors out there who to accept a fiduciary standard and in fact have done so gladly. That small group would be Fee Only planners and advisors, which is an admittedly small minority or the industry. Check out Napfa for a list of us.

I consider myself to be a white hat in a black hat business. We are rare but we do exist.

Thank you for your note, Karl. My apologies for not including an acknowledgement that there are plenty of “good guys” out there who are offering solid investment advice to individual investors. 

And for those of you who want to look further into investment advice from an advisor who operates under the fiduciary standard, here’s the website Karl mentioned in his letter.

Next, John wrote:

Your article touches a sensitive nerve in the financial services industry. It is one that a select group of advisers, however, have supported for a very long time. I’m speaking of Registered Investment Advisers.

Many financial advisers (although not enough) have broken away from the traditional Broker/Dealer platforms and joined the ranks of RIA’s who ARE held to a fiduciary standard. You state that only those managing trusts for people with a lot of money get the advantage of dealing with these individuals who put the client’s interest before their own. Although that is true, it does not cover the majority of RIA’s.

The vast majority manage funds for clients with assets ranging from $50,000 and up. Not a particularly rich number. We are in a minority and welcome articles, such as yours, that encourage everyone with financial assets to speak to a Registered Investment Adviser to get advice that they can trust. Like many attorneys, we also do an initial interview at no charge.

Thanks for your time.

Thanks for that note, John. I have long felt that the individual investor is somewhat overlooked in the industry. And finding good, reliable advice can be a struggle.

I fully believe newsletter editors such as myself help fill the void, and I operate my Wealth Advisory newsletter with an eye to not only provide solid income investment ideas to my readers but also offer useful insights into the economy and stock market valuations that help them invest with confidence.

So I appreciate your efforts, John, to provide quality service to the individual investor.

Now, one more letter from a lady who expresses the plight of the individual investor… 

Peg wrote:

Good article Briton.   My question is what are retirees to do when they have limited knowledge of the stock market?  We have about half of our modest retirement savings in a managed account @ Fidelity Investments, earning  3 – 4% net after fees.   The rest  we manage ourselves after doing research and reading several investment newsletters.  We’re doing better than Fidelity, but it’s a crap shoot, and we have our share of losers. Any advice would be appreciated.

Yes, Peg, I do understand that good, reliable advice is hard to come by. And because the whole “Wall Street Complex” seems to be the “keeper of the forbidden knowledge,” we all have a tendency to rely on the analysis and advice that comes from the Goldman Sachs’ and JP Morgans of the world and treat it as gospel.

But I think we, as individual investors, need to take Wall Street off its pedestal. Peg, as you note, you have been able to beat Fidelity’s performance. And that’s just not just luck. 

I’m not going to tell you that I get it right every time and that I don’t have losers, too. But I do have the luxury of devoting a lot of time to my research and analysis. So I’ll offer a few ideas here.

One thing every investor should consider is an S&P 500 index fund. Something like 90% of mutual funds can’t beat the S&P 500 consistently. So why not just own the benchmark? It’s easy, cheap, and it beats most fund managers. 

Tips for the Individual Investor

I am adamant that individual investors should take as much control of their investments as possible. Of course, that means having a basic understanding of how the financial markets work, what the economy is doing, and how to value individual companies as well as the S&P 500. 

None of these are hard to accomplish. Any investor can get a good handle of how timing, economic growth, and stock/bond prices fit together with a few hours of study a month.

And here’s a research tip: Don’t get too caught up with the predictions and forecasts of investment gurus. One guy says the stock market is about to crash, while the next guy says the stock market is going to launch.

Nobody can predict the stock market with 100% accuracy, so if you base investment decisions on some prediction of where the stock market is headed, it’s likely to be wrong. 

The bottom line is that bear markets are caused by recessions, and recessions are somewhat rare. 

Pay attention to earnings-per-share estimates for the S&P 500. Earnings are the lifeblood of the stock market.

Analyst forecasts aren’t ironclad. Over the course of a year, they will usually be off between 4% and 8%. But these estimates are important for two reasons: One, they give you insight into the trend of earnings growth, and getting the trend right is always more important than nailing a specific number. And two, if you understand what investors are expecting, you’ll have a baseline for determining whether expectations are being met or if investors are disappointed. Disappointed investors tend to sell.

Every month in The Wealth Advisory, I take a look at earnings per share (EPS) estimates for the S&P 500, see how they’ve changed, and keep a good handle on whether the market in general is getting too expensive. I also monitor economic growth to ascertain whether it remains supportive of EPS growth. I review each stock in the portfolio to make sure the fundamentals remain positive.

These are exercises that individual investors should do: Keep track of EPS estimates, and watch how they change. Keep track of GDP estimates, and see how they change.

And finally, review your stocks every few weeks. You don’t have to obsess over them and check them every day — just keep up with the product and watch how analyst earnings estimates change over time.

Again, all this can be done in a few hours a month, and I think you’ll find the stock market starts making more sense to you.

Until next time,

Until next time,

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Briton Ryle

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A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He is also the managing editor of the Wealth Daily e-letter. To learn more about Briton, click here.

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