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A Fairy Tale

February 8, 2008

Mark on the markets Mark Patterson

A fairytale

Once upon a time, there was a lamb, which huddled around other lambs in the herd. The lambs were often herd to fields to graze on grass which had grown where bulls used to graze. They were often lined up and lead to these fields by a pied piper” financial advisor”. One day while being herd to the bull fields, one of the lambs saw an owl sitting on a limb perched above the path. The owl looked down at the lamb and asked, why do you all go to the fields where the bulls used to graze? The lamb answered, well, our “financial advisor” says the grass is extra good because the bull droppings have made the grass green and juicy. The owl asked, what do you do in the fields? The lamb answered, we eat and listen to stories about how great our mutual funds are. The owl asked, are they great? They must be, said the lamb, our “financial advisor” said so.
After the owl reviewed the mutual funds that the lambs had in their portfolio, he found that the mutual funds were all in the same fund company or family. The owl also found that none of those funds were top performers and that they were not well diversified among asset classes or regions of the world. The owl explained to the lamb that by using mutual or exchange traded funds from other companies and families, they could increase their returns and reduce risk significantly.
The lamb asked the owl, why didn’t our “financial advisor” tell this to us? The owl answered, most of these top funds are no commission or no load funds, and it takes time and effort to look around and research these funds. In other words, it takes work.
The lamb said that their fund family was performing great and was low risk according to the “financial advisor”. The owl explained that confusing underperformance for lower risk is a common told fable across the land by these “financial advisors”. The “financial advisor” says that we are long term investors, so not to worry if our funds are not doing well at this time, says the lamb. The owl explains to the lamb, that proclaiming to be a long term investor is a way for the “financial advisor” to defer any blame or concern for not watching economic and market trends, in other words not doing any work to adjust the portfolio, or optimize its holdings based on current market conditions.
After more questions and answers, the lamb felt that he had gained a great deal of knowledge from the owl. The lamb went for a drink of water in a nearby pond and saw a reflection in the water that he did not recognize. It was the image of a lion. The owl told him that now with his new knowledge, he would no longer be a lamb led by the pied piper “financial advisor” to graze in the fields of bulls#&*. The newly transformed lion felt hungry and asked the owl if he thought it would be ok to eat a lamb. The owl said no, it would be too easy, go chase a gazelle; at least it will be a challenge.
The moral of the story is one that I believe any good advisor would agree with. No single fund company or family has the best funds in all categories. Many of the best performers are “no loads’ or no commission funds. A fee based or “wrap” account allows your advisor to use a much larger universe of the best mutual and exchange traded funds that can be used to build a real diverse portfolio whose positions can easily be adjusted for market conditions and opportunities. And yes, it is OK to take a profit, if you have made money. Taking profit does not make you a trader; it just shows that you are paying attention.