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The Mantra of the Whole Investment Industry is Simply Not True

January 20, 2014, 6:00 AM

There is an awful lot of bad financial advice out there, provided by professionals.  I don't mean advice like stay out of debt, start saving early, make a budget. That's like motherhood and apple pie. Who could disagree with that? 

I'm not sure you need a financial advisor to tell you that, but where financial advice can be very costly to you—and let’s define that as bad financial advice—is when it comes to risk taking.  There is a very big problem of risk illiteracy, just lack of any knowledge about how to properly frame and make choices in conditions of risk.  And unfortunately, it extends to the community of most professional advisors. 

They will assure you—and when I say they, I mean, most investment advisors today, the vast majority, will tell you that if you are investing for the long run, you can feel very confident in putting the bulk of your money into a diversified portfolio of stocks.  And they will make statements like, “All the evidence that we have shows that in the long run, stocks are going to outperform everything else, and in particular, government bonds.” 

This is the principle alternative, because it’s the safest thing we have to invest in—at least in the United States. I wouldn’t recommend Greek government bonds, or even Italian government bonds at the moment.  But certainly US Treasury obligations around the world are considered dependable in the sense the American people are not going to fail to make good on those bonds.

So that idea couldn’t be further from the truth.  Most people don’t know how to invest. It’s very complicated.  And advisors keep hammering into them the idea that stocks are for the long run, stocks are the best. I’m sure you’ve heard that. That’s the mantra of the whole investment industry. It’s simply not true.  In fact, the opposite is true.  

We don’t know how the US economy is going to perform over the next 30, 40, 50 years.  We don’t know how any economy is going to perform. In the 1980’s, everyone in this country was virtually positive the Japanese economy was going to outperform the US economy, over as far as the eye could see.  And by 1990, they were stagnating.  Their stock market today, the level of the stock market in Japan today, is 25% of what it was in 1989.  Over that period, Japanese bonds were paying interest, not a high interest rate, but you wouldn’t have lost any of your money, if you were Japanese.  

In Their Own Words is recorded in Big Think's studio.

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