Many stock brokers, financial planners, and even DIY investors believe that picking individual stocks is the key to avoiding massive portfolio losses as experienced in 2008 and early 2009. That’s a variation on the theme that managed funds are superior to indexed funds. There is abundant evidence that disproves that notion.
Even the experts are acknowledging problems with traditional ideas of risk vs. reward equity investing. In this story, one financial manager puzzles over why Apple stock took such a tumble in 2008. Finally, he concludes that “The macro influence will dwarf individual stock situations.” In other words, when the economy itself is suffering, nervous investors will flee all sectors and cause otherwise “good” stocks to fall in unison. At that point, it doesn’t matter how smart you are, your smart picks will be punished. If those “smart stock picks” are intended to provide your basic income in retirement, you are in trouble.
Along the same lines, this recent article questions whether investors can rely on the financial planning advice from advisors tied to the retail investing industry. This columnist’s thoughts are summed up this way:
After the financial meltdown that gutted some portfolios by up to 50%, after Bernie Madoff, Earl Jones and this week’s Ponzi scheme fraud charges against two men in Alberta, investors are understandably questioning the basic relationship between them and the industry, to the point that financial advice itself is under fire.
Though stock portfolios are looking better now than six months ago, some people are thinking that the financial advisors who stood by and watched as two stock crashes in a decade wiped out trillions of retirement savings might be, say, surplus to requirements.
Entrusting your retirement income needs to those who are motivated to sell you investments can be dangerous indeed.