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JUN
05
Financial Literacy: Necessary and Dangerous

One of the major issues facing financial advisors today is how to increase the financial literacy of our clients. In other words, how do we make financial decision-making feel less daunting and provide a better understanding of the method to the madness (so to speak)?

One thing I tell clients who want to deepen their knowledge in this area is to read something. Whether it is the Wall Street Journal, Bloomberg, Money Magazine, Kiplinger's, or something else entirely, adding a financial publication to your regular reading will help you understand the economic factors that impact everything from our global economy to your personal portfolio.

While I stand by this piece of advice, it is also a very slippery slope. It's true, in most areas of our lives, the more information you get, and the more up-to-the-minute it is, the better we can do business and make astute decisions.  It is interesting that investing is one area where the opposite is true. The truth is that much of the information available on normal news reports, cable TV investment reports and investing articles, the ones we are all bombarded with on a daily basis, can be very detrimental to your financial health.

This may sound ridiculous, but think about this for a moment. Virtually every quarter, magazines like Barron's, Money and Kiplinger's will spend pages upon pages focused on mutual fund managers that have outperformed their peers over the previous three months. These worthwhile publications will provide page after page of evidence that will lead you to believe that these managers are certified geniuses. There is just one problem—a three-month track record is as much statistical nonsense as when baseball pundits predict success based on the day of the week or the time of day that a game is played. The "fund of the hour" is always in danger of reverting back to center, which is why the hottest funds in one quarter are rarely, if ever, still on that list a quarter later.

Even one-year and five-year rankings have little to no predictive value, especially when the focus is on those who are outperforming the norm. Investors who focus on the most recent past are in danger of chasing returns right into oblivion. That is why, when looking at historical returns, most advisors, present company included, focus much more on 10-year returns than anything shorter. I will admit, it is easy to be seduced by large short-term numbers, but as many clients have heard me say, by the time you hear that something is hot, you have already missed the growth opportunity.

A perfect example of this is the tech bubble of the late '90s. When people were buying tech stock after tech stock, when Amazon, for example, had a share price that reached approximately the same level as the entire yearly economic output of the nation of Iceland, advisors began worry that this level of growth would eventually pop. Well, it did, and many investors lost money hand over fist.

In today's terms, I am not sure how many more times we can hear about how we are "overdue" for a downturn. Just this morning, I saw several publications with new articles saying the same thing we have all been saying for what feels like forever. We have said it this year, we said it last year, and in some cases...we said it the year before. Now, this is not to say that we are wrong. Inevitably, there will be a downturn, and we will all suffer some of the impact associated with it. The real problem is how we react. I can't tell you the number of times I have heard consideration, by some, of putting money under the mattress or into a CD, to ride out the coming downturn. People have these conversations, all the while, the market continuing to set record highs. A much more reasonable strategy is to let the markets take us where they will. Because there are two things we know...there will be a downturn, and there will be a recovery.

Based on what I have just said, you are likely thinking I have just contradicted myself, and actually DON'T think you should read any financial publications. That is not true. What I am saying is that instead of reading it to try and find that stock tip or fund choice of the moment, use it to garner a better understanding of the global economy. Instead of giving into journalists who sensationalize the good and the bad, you should try to clear out the noise, and learn about what is actually happening in the financial world, not what might happen, or what has happened over the shortest possible period of time. Don't focus on the outliers, on every positive or negative report that gets the green light to be published. I promise you, investors who read, understanding that despite short-term ups and downs, we must stay the course, always experience the largest growth when the market hits the inevitable all-time high.

And for the record, if you are looking for something to read, I would choose the Wall Street Journal.



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 Securities offered through American Portfolios Financial Services, Inc. Member FINRA/SIPC (FINRA/SIPC). American Portfolios Financial Services, Inc. and American Portfolios Advisors, Inc. are not affiliated with any other named business entities mentioned.

This communication is strictly intended for individuals residing in the state(s) of CA, CO, CT, FL, IL, KY, MA, MD, NJ, NY, PA and VA. No offers may be made or accepted from any resident outside the specific states referenced.
 


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