Naked Truth Investing: Beware of facts omitted
This is part of a new series of columns called "The Naked Truth," by retirement expert Dan Solin. Please bring him your questions, in the comments box, and he will answer as many as he can.
You are supposed to be able to trust and rely upon your broker or advisor, right? The securities industry spends hundreds of millions of advertising dollars to convince you that your reliance is justified.
The legal obligation of these "investment professionals" is very clear.
They cannot fail to disclose any fact "material" to your decision to make an investment.
Every day brokers recommend actively managed mutual funds to their clients. When making these recommendations, they do not disclose:
1. Only 1 in 3 of these funds will equal or exceed their benchmark in any year;
2. Over a 10-year period, less than 5% of actively managed funds will equal or exceed their benchmark;
3. Index funds will equal their benchmark (less low expenses) every year;
4. The cost of index funds is anywhere from 300% to 1000% less than the cost of actively managed funds.
If you knew these facts, would you buy the more expensive, under-performing, actively managed fund? Would you consider these facts to be "material" to your decision making process?
Why do "investment professionals" fail to disclose these critical facts?
Because it is in their financial interest--but not yours--to do so.
Dan Solin is the author of The Smartest Investment Book You'll Ever Read (Perigee Books 2006) and The Smartest 401(k) Book You'll Ever Read. Visit his website at Smartestinvestmentbook.com.