Naked Truth Investing: What If Alan Greenspan was your broker?
Good news! Alan Greenspan has agreed to help you invest for retirement.
How fortunate you are! You have so many questions. Like "is this a good time to be in the markets?" and "are we headed for a recession"?
It gets better. Alan has agreed to moonlight on your account while serving as the Chairman of the Federal Reserve Board. This gives him access to inside information that no one else knows about the economy.
Alan calls you late one night after a hard day's work at the Board. He whispers that he is very concerned about the markets. He says something about "irrational exuberance" and "meltdown."
Quick action is obviously required. You call your broker and sell all of your stocks. You are now safely invested in bonds. You sleep great that night.
If you had listened to these predictions when Alan made them in 1996, you would have missed out on a three-year market boom where the S&P 500 doubled in value.
If the most knowledgeable person in the world about the U.S. economy could be so wrong, what are the chances that your broker or advisor has more reliable information? Yet, every day, millions of investors call their brokers and advisors and ask their advice about market timing, stock picking and mutual fund selection.
As Dr. Phil would say, How is that working for you?
Not very well.
One study found that market timers in stock mutual funds lost 3.29% per year on average.
If you are investing for retirement, relying on your broker or advisor for market timing advice is a really bad idea. It is unlikely that she knows more than Alan Greenspan.
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 (Perigee Books, June 24, 2008). Visit his website at Smartestinvestmentbook.com.