Singaporeans love all things free. My parents would trawl various exhibitions on investments hoping to get a free cup of coffee and some cakes, at the same time get some pearls of wisdom from the speaker on some latest investment products like a condo in Iskandar, a unit trust sold by a bank etc.
The biggest mistake that these poor souls make is not to understand that "NOTHING IN LIFE IS FREE"!! Listening to a real estate analyst or agent speak about how good that spanking new condo in Iskandar is, or how good that London off plan apartment is, is as objective as listening to a politician tell you why you should vote for him! It is everything but objective because these people have an agenda, which is to sell you things. Your agenda is education and objective advice and as long as your agenda is different from the speaker's, you are doing yourself a great deal of harm by attending such useless talks except to get free food!
Now I'm not saying that all speakers are biased towards their own products. There will be some who genuinely analyzed their deals and try to sell you the real stuff. But you need to separate the wheat from the chaff.
One way to discern is to find out how the speaker is paid. Is it by selling the apartments to you, the financial products to you? Or does the speaker earn a cut from your own rental income, a cut from your profit or of your asset under management? The latter is the best form of remuneration for an adviser because it aligns the interest of the adviser with the client.
I am never an advocate of paying a real estate agent an upfront fee of 1 month's rent for 12 months of tenancy lease. In London and New York, you pay 10-15% of your monthly rental income. This encourages the agent to continue to handle various issues the tenants may have.
When it comes to financial products, clients should move towards paying an advisory fee over their investment assets. They should refrain from paying only on transaction. Let me ask you, if I were to get paid only when you buy something from me, would I not then try to instigate you to buy and sell more frequently even when I believe your current position will appreciate further?? Very soon, transaction costs will eat away your investment returns! I will focus only on making you transact, not making sure your returns are maximized !! This is something the banks and MAS need to wake up to, for the good of all.
You also need to check if your adviser is successful in her own investments. If your adviser is young, trained in marketing and arts, not in finance, you are better off asking what the financial institution's official views are, what the official asset allocation is, not the view of a 28 year old's personal views! Now I am very serious in this because you cannot misattribute the knowledge of a banker with the knowledge of the bank's research analyst!
Next time, if you see your adviser diving a nice car, or own a nice house, ask if the adviser earn it through commissions or through her own investments. Of course she'll tell you that she made most of it from her own brilliance. If you doubt it, then ask her for her investment views, and the bank's views. Write them down and refer to them again six months later to see if they pan out. If in doubt, just rely on the research analysts. They may not be perfect, but they are better.
For me, I chose mentors who actually made millions investing in real estate and stocks. They are gems and I intend to keep them as friends for life because of their brilliance and kindness in teaching me. They surpass even the best analysts because if you' brilliant, you wouldn't be writing research reports and publishing them. You'd be sipping piña colada in Berhamas and having brunch on a week day afternoon. That's what I intend to do one day, soon!!
ON March 14, 2012, Greg Smith resigned from Goldman Sachs in an op-ed published by the New York Times.
It was a notable moment in financial history for a couple of reasons. First, Mr Smith levelled an embarrassing public resignation at a storied American investment firm. People don't just up and quit Goldman that way. (Though the firm has drawn its share of wrath, most famously in a Rolling Stone article by Matt Taibbi that described it as "a great vampire squid wrapped around the face of humanity.") Perhaps more notorious was the introduction of the word "muppets" into the lingua franca of finance.
After 12 years of lucrative employment, Mr Smith's conscience had begun bothering him. Goldman's clients were being "ripped off" and not only that, they were referred to as "muppets" by other employees. Who doesn't love the Muppets - Kermit the Frog, Miss Piggy and company - those adorably absurdist stars of screen and stage. Goldman did eventually investigate, but it found no evidence of muppeteering.
Amongst the financial Twitterati, the term muppets has come to describe any client used and abused by some financial predator. I've adopted the term to describe portfolios that have been assembled for purposes other than serving the clients' best interests.
I want to draw a distinction between those portfolios that are merely mediocre and a true muppet portfolio. Asset managers have different approaches, and I don't wish to suggest there is only one way to run money.
There are many ways one can attempt to reduce risk, improve performance, lower drawdowns and reduce volatility.
Rather, I want to distinguish between portfolios that try to do right by clients but miss the mark vs the ones that were assembled for the sole purpose of maximising commissions to the retail broker, period.
My colleague Josh Brown's book, "Backstage Wall Street", detailed the myriad ways financial sharks take advantage of unsuspecting clients. These practices supposedly no longer exist. In fact, all too many portfolios are assembled in those sausage factories.
About 10 per cent of the new accounts that we see are muppet portfolios. These typically hold hundreds of positions. Mind you, these are not from a family office with US$150 million, but a portfolio 1 per cent of that size. There is no rational reason for these sorts of assemblages to be holding 100-plus positions.
How does this happen? As Mr Brown explained, brokers are constantly barraged by the Street's financial wholesalers. These are the mutual fund families, the exchange-traded funds merchants, the product providers who spend their days making presentations to financial retailers.
The broker goes to some conference room or hotel, where over a free lunch of rubber chicken the product du jour is pitched. The explanation of why the product even exists is made, a hypothetical historical performance flashes by, a clip of the manager on TV is played. Afterward, the brokers return to their offices, where they start "smiling and dialling". Every client gets the smooth sales pitch, filled with those sexy details the broker only learned existed an hour earlier. Repeat every month, and after a few years you end up with muppet portfolios.
A better way to view the investing world, in my opinion, is to break it down to 15 broad asset classes and own all of them. These include stocks, bonds, real estate, commodities and cash. US stocks differ from emerging markets, which are not the same as Treasury's or foreign high-yield bonds, to name a few. You want to own all of these because from year to year, no one ever knows which asset class is going to perform the best. And no one can tell in advance which asset class is going to have a bad year. So you own them all, and you don't worry about it. Much of what you own is going to be going up most of the time.
The beauty of diversification is it's about as close as you can get to a free lunch in investing. The best part about modern investing is you can access these broad asset classes at very low costs - typically 15 to 50 basis points. And the cost of buying these now through an online broker is less than US$10.
Today, a smorgasbord of ETFs offer investors direct access to these asset classes. Exotic instruments add little, if any, value to a properly diversified portfolio.
Don't be a muppet. "Returnless risk" is not how you prepare for a decent retirement. - WP
The writer is chief executive of FusionIQ, a quantitative research firm. He is the author of "Bailout Nation" and runs a finance blog, the Big Picture.
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