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Protecting your 401K from Wall Street

• Deregulation

• Brainwashing and dishonest research

• Hidden fees and fudged numbers

Deregulation

"Deregulated financial markets" are very dangerous waters for 401K investors. Neutering the Glass-Steagall Act in the 1990s (with generous help of Sir Alan, Subprime Maestro as he used to be called  after "subprime" mess unfolds ) contributed to the dot-com bubble and stock swindles that looted many 401K investors. It also stimulated hypertrophy of financial sector and led to the destruction of jobs and manufacturing. Sir Josiah Stamp aptly explained the situation:

"The modern banking system manufactures money out of nothing. The process is perhaps the most astounding piece of sleight of hand that was ever invented. Banking was conceived in inequity and born in sin . Bankers own the earth. Take it away from them but leave them the power to create money, and with a flick of a pen, they will create enough money to buy it back again . Take this great power away from them and all great fortunes like mine will disappear, for then this would be a better and happier world to live in . But if you want to continue to be the slaves of bankers and pay the cost of your own slavery, then let bankers continue to create money and control credit."

--- Sir Josiah Stamp, president of the Bank of England and the second richest man in Britain in the 1920's, speaking at the University of Texas in 1927.

The dirty secret is that most of the investment community is preying on fear and ignorance. For instance, pension funds and endowments hire money managers, even though there is ample evidence money managers add not value (see a paper by Vishny, Lakonishok and Schleiffer over 20 years ago) And then these entities hire fund consultants (who of course charge fees) to help these saps pick the right fund manager. Warren Buffett has repeatedly warned that Helpers, as he calls investment middlemen, reduce the returns of those who have capital. Stock markets are not a level playing field, never was and never will be. 401K investors served and will serve as donors for Wall Street firms. Moreover the steady stream of  money from 401K investors to S&P500 and similar funds create Ponzi scheme friendly environment and serve as a base for various, often pretty complex financial manipulations, which at the end of the day hurt those who provides foundation for them.  

Mutual funds are part of Wall Street and in no way are trying to protect your investment. They are for-profit enterprises and by definition their first task is return to shareholders. Vanguard tried to smooth this conflict by viewing customers as shareholders and in a way is a better mutual fund family. But in reality it is controled by advisory firms and its fees are not always the smallest you can get and Fidelity sometimes beats it for equivalent funds. So much for interests of investors. In very few other areas society does not criminalize such blatant conflicts of interest.

Brainwashing and dishonest research

Every IT professional who got crushed back in 2000 suffered losses not only because the game was rigged but also because most people including myself were greedy and ignorant. But while decisions were our own, we were 'helped" by dishonest research, dishonest CIO of dot-com bubble, and Wall Street PR machine with CNBC as the most well-known example.   But this is a small part of a larger problem  -- "brainwashing" or instilling "acquired idiotism" into 401K investors. Wall street is an institution that redistributes financial flows and reaping huge benefits in the process. They do not produce anything and to gen nice returns need to bigger and bigger share of profits. That means that for Wall Street 401K investors is a legitimate and welcomed pray.  Many 401K investors hurt themselves during dot-com bubble because they focused only on tech stocks who are promoted by sleek, extremely well paid "Wall Street photo models" like talented "stocks circus entertainer" Jim Cramer (the host of the chair-hurling, financial advice-shouting circus called Mad Money; Cramer's show is on so often, that it seems to run like a film loop) and CNBC's Maria Bartiromo (aka Money Honey; see From Disco Queen to Business News Diva and Maria Bartiromo Is No Fool ) to name a few and they influence our decisions. 

Jim Cramer is probably is the most colorful of CNBC "stock circus" clowns. As Jon Friedman noted in his MarketWatch CNBC's Jim Cramer crosses a line (Jun 16, 2006) :

CNBC needed someone like Cramer to give the network some pizzazz, for sure. After all, think about it: How many days can viewers stand to see their favorite stocks falling?

After the Internet bubble burst in 2000, some viewers (illogically) blamed CNBC for their woes, saying the network contributed to the illusory run-up by endlessly broadcasting the virtues of tech-stocks investments.

So when Cramer came along and injected both a strong personality and an equities expertise, the ratings soared and CNBC had accomplished a slam-dunk victory.

Another talented CNBC economic news clown is Larry Kudlow. With his specialization in economic ignorance and supply side tendencies sometimes he can be even more entertaining then Jim Cramer. The comical effect increases due to the fact that he has  Ph.D  in economics (if supply side economics can be considered to be a science, which I seriously doubt) and the fact that he was former Ronald Reagan economic advisor.  I am wondering does Larry Kudlow read Larry Kudlow's columns dated a year or so ago and/or watch his past shows (preferably with the same one year lag)?  If so does he laughs ?  But those in powers will never kick his ass from the TV -- he is just too useful. As Brendan Nyhan  noted in his article Larry Kudlow's counterfactual reasoning

Via Matthew Yglesias, here's Larry Kudlow's latest hand-waving defense of supply-side economics:

Tax revenues have been surging from personal incomes, capital gains, and dividends. Now, the Congressional Budget Office would try to argue that these revenues are lower than would have been the case if taxes had not been cut. But who’s to say? Economic growth would’ve been slower and hence revenues without tax cuts might have been lower. All we know is what we know—namely, revenues have been steadily rising in the aftermath of lower tax rates.

"[W]ho's to say?" As Yglesias writes, "Who, indeed, other than, perhaps, the staff economists at the Congressional Budget Office who are trained to make such calculations." Don't forget about all the current and former Bush administration economists and budget experts who admit that tax cuts don't increase revenue! (Ed Lazear and Greg Mankiw, among many others)

I was struck, however, that Kudlow seemed to grasp the relevant counterfactual -- the level of federal revenue we would have observed over the same time period had a tax cut not been enacted. Usually, he just touts increased revenue levels over time and (falsely) assumes that those increases prove his point (see this random example from Google, for instance).

It's hard to know if the problem is intellectual dishonesty or fundamental ignorance. As Kudlow himself might put it, who's to say?

As for this dilemma of "intellectual dishonesty or fundamental ignorance" I am inclined to see Kudlow more ignorant then intellectuallally dishonest  :-).  In truth Larry Kudlow is just a hired gun, a propagandist. He freely admits such. Listen to his tag line, "We're Right on the politics, Right on the economy."  This view is reinforced by several judgments from the Net.  Ezra Klein in  What Does Kudlow Know gives a nice example:

"Kudlow isn't a specialist in something else who's just freelancing in economic ignorance on the National Review blogs," writes Matt. "This is supposed to be his area of specialization. But he doesn't know anything about it."

I've done a fair amount of television at this point, and argued, in general, with a fair number of conservatives, and I have literally never encountered an interlocutor who seemed as utterly ignorant of his subject as when I went up against Kudlow. The guy may not be a health care specialist, but he professes to be a business economist, and anyone who's read The Wall Street Journal over the past decade should have at least a passing familiarity with the subject, and any economist should be able to quickly understand the various types of market failure bedeviling the system. But so far as I could tell, he knew, literally, nothing. That's not a condition of ideology. Plenty of conservatives can argue health care. This was a condition of truly spectacular ignorance. Spectacular not because he didn't know, but because he thought a few free market aphorisms were a sufficient substitute for actually knowing. And yet he's seen as an expert. It's bizarre.

As for the quality of CNBC advice recently John Hussman provided to the readers of his column Weekly Market Comment an interesting story attributed to Henny Youngman:

Henny Youngman used to tell a story about a guy who hears a little voice in his head singing “Go to Las Vegas .” So the guy immediately turns his car around and heads for Las Vegas . The voice says “Go to the roulette table.” The guy goes to the roulette table. The voice says “Put $10,000 down on red.” The guy puts $10,000 down on red.

He loses. The voice says, “Hey, how ‘bout that?”

Investors are hearing a thousand little voices here telling them to “ride the bull,” that stocks have a “floor” under them, and that valuations are cheap. Whatever risks investors choose to take, they would do well to recognize that if those risks go terribly wrong, most of those little voices will be passive observers with nothing to say but “Hey, how ‘bout that.” You should evaluate every argument, bullish or bearish, based on the quality of the evidence and the credibility of the source.

If you think the people on Wall Street are your friends, if you think CNBC is giving you good advice, if you think your all-stock 401k is a safe investment, or if you think the stock market outperforms every investment over the long run, then you really should stop reading here.

Actually the danger of excessive power of bankers is an old sentiment. Thomas Jefferson warned of the damage that would be caused if the people assigned control of the money supply to the banking sector:

 "I believe that banking institutions are more dangerous to our liberties than standing armies. Already they have raised up a money aristocracy that has set the government at defiance. This issuing power should be taken from the banks and restored to the people to whom it properly belongs. If the American people ever allow private banks to control the issue of currency, first by inflation, then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children will wake up homeless on the continent their fathers conquered. I hope we shall crush in its birth the aristocracy of the moneyed corporations which already dare to challenge our Government to a trial of strength and bid defiance to the laws of our country"

Thomas Jefferson, 1791

More peripheral but still important is the theme of "fiat money and the banks". Here the main lesson to be drawn from the last bear market (2001-2003) is that the predatory behavior of the large part financial advisory community is a feature not a bug.  Of course there were honest hard working advisors who managed to cushion the losses and preserve most of the capital of their clients. But most of them were of "perma-bull" variety serving the banks not people.  They were just used as sedative stimulating you to continue cost averaging strategy even in conditions where all signs were for moving to more defensive position. Naturally they failed to give any warning about  dangers connected with exorbitant P/E ratios, low earnings yields, dividend yields, and other classic valuation measures. They never mentioned about the culture of corruption with exorbitant options payments, backdates of options, 24*7 CNBC taking heads pushing stocks and other shadow deals. Some of  them were ousted after the crash but many are still around.

Earning expectations game is another funny "perma-bull" game that industry plays. As far as I can tell you can instantly discount them by 20% or more. Also they never discuss quality of earnings. Actually right now quality of earning are low while earning itself are high because the main instrument for raising earnings is cutting job costs. In this sense too tales about actual level of analysts independence that were published after 2001 are really interesting and is a very sobering read any year and at any stage of the market cycle.

There are also problems with funds that are trying to play the fashion of the current moment including S&P 500. The S&P 500 and most other popular indices rank their constituent stocks by the total value of their outstanding shares. A stock that is overpriced is correspondingly overweighed, as was Cisco, Amazon Yahoo (and many other tech. high fliers) in 2000. And I known for sure that S&P added Yahoo at very high valuations and damped it after it lost most of its value. Now similar story is probably is replayed with Goggle.

Usually specialists like programmers do not have much money in 401K accounts until mid-forties contributing at best only the portion matched by their employers (say 4%). Their contributions peaks around 55 and decline as soon as age-related problems with employment surface. It is not unreasonable not to contribute much before your children are out of college. For many people with children and a house significant contributions to 401K during this period are simply impossible. But this means that real total investment horizon for 401K investments is essentially 20 years or less (45-65) with only 5-10 years of peak contributions. The latter are separated from retirement by approximately 10 years of declining wages. As I mentioned before for those in their 50s calculating how much they will need at retirement involves predicting the inflation rate for the next three decades, not a small feat...

The economic dynamics of the past ten years suggests that stock market fails standard economic tests of efficiency, and is behaving in a different way then most popular economic abstractions like "efficient market hypothesis".  The key issue here is be slightly skeptical about any economic guru and avoid experimentation with your portfolio or putting all eggs into one basket be it shocks, or bonds or gold based on some new fashionable investment trend. Please remember that as for financial gurus there is definite oversupply problem here even if we count only the most successful, having several books printed: many of those books smell Lysenkoism. Blatant disregard and/or ignorance of even elementary statistical principles (within the topics covered by basic statistical course for financial specialties) is one common feature of most works in this area.

In August 2005, in comment to Business Week article Real estate and Recession  reader using userid Wes noted a specific dander that educated, middle class professionals encounter as investors because paradoxically they represent the major prey for financial industry:  

"Where are the big-money folks? Sitting on South Beach drinking mai-tais and laughing about the entire process, thanking a higher power they cashed out of the market when they did. The same thing happened back in 2000.

It wasn't the big money that got slammed; they pulled out early. The small timers and day traders pushed the market to the breaking point. Many of them lost their life savings and retirement accounts while the big money were losing amounts that looked like rounding errors.

The real issue here is that the same people who are creating the mania will be the ones that pay most for it. People in my demographic (educated, middle-class professionals) have the most to lose. Some of my peers who know nothing about financial markets and even less about repairing a sink faucet are buying rental properties, mainly responding to the market hype they overheard at Starbucks while buying a morning latte. This same group has been known to "weathervane", throwing money into the markets that seem to be hot without having a diversified, sustainable strategy to maximize long term wealth."

If so, the the defensive strategy is the key for preventing huge losses (401K tax) that financial industry is trying to impose on you (similar like lotteries impose an implicit tax on workers).  Paul B. Farrell, in his Nov 13, 2006 column noted:

Wall Street operates like a Vegas convention of competing magicians, all trying to discover the other guy's secret. Hoping to get richer in this magical world of deception, they make your money disappear and magically reappear. Every day, billions of magic acts on Wall Street, vanishing here, reappearing there, often into their pockets.

We're warned at the opening of the new film, "The Prestige:" "Are you watching closely?" You're in London a century ago, watching two magicians in a deadly battle of one-upmanship. Obsessed about secrecy they send spies into the enemy camp. Constantly upping the ante, taking ever-greater risks, undeterred, even inspired by deaths in the wake of their battle. Their obsession's worthy of Wall Street's magicians.

What is magic? "Every great magic trick consists of three acts," says actor Michael Caine: "The first act is called 'The Pledge.' The magician shows you something ordinary, but of course, it probably isn't. The second act is called 'The Turn.' The magician makes his ordinary something do something extraordinary. Now if you're looking for the secret, you won't find it. That's why there's a third act called 'The Prestige.' This is the part with the twists and turns, where lives hang in the balance, and you see something shocking you've never seen before."

Act One: 'The Pledge' of a new bull market

Wall Street's cheering a new bull market: Something ordinary "that probably isn't." Oh really? Why? Suppose you put $11,722 in the market back in January 2000. A few weeks ago the Dow finally hit a new high for the first time in almost seven years, and you're back to even. Big deal? Hardly

Today, you have slightly over $12,000. So let's say you've gained roughly $75 a year on your initial $11,722 investment, less than 1% annually since 2000. The truth is, Wall Street hasn't done much for the little guy the past seven years.

Actually, it's even worse. For almost seven years, inflation's been eating away at the value of your $11,722, making it worth less. You've lost money. Lots. Even with that meager $75 annual gain, your $11,722 is actually worth maybe $10,500 today.

And while you're losing, Wall Street's making megabucks in fees and commissions, stockpiling billions for 2006 bonuses. It's also been a great year for hedge managers and CEOs pocketing record salaries. Welcome to America's new "trickle-up" market.

Any financial con artist worth his warm smile is aware that "donors" as a rule are  victims of their own greed. Moreover -- by means of our complicity in allowing our identities to be molded by a culture dominated by marketing, empty promises and predictions, and our own self-deceptions -- the fate of a hapless "donor", bamboozled by self-inflicted selfishness is not an exception. It is a rule.  Wall Street is not a charity. It wants a fat cut. As Robert Kiyosaki  recently wrote in his  Mutual Funds Get Greedy  Yahoo column:

To quote Bogle, "Simply put, fund managers have arrogated to themselves an excessive share of the financial markets' returns, and left fund investors with too small a share." Elaborating on that point, Bogle writes, "With today's dividend yields on stocks at about 1.8 percent, a typical equity funds expense ratio consumes fully 80 percent of a fund's income."

In any simulations it is clear that holding large percentage of stocks during the last five years of your major contributions is dangerous as you can run into the same situation as people, who retired in 2002 and early 2003.  In such situation fear rules and most people simply sold their stock holdings converting paper losses into real. To avoid such behavior requires "steel nerves" and a very good understanding of finance -- two qualities that are extremely rare.

Actually simulation of different periods instantly reveals the real danger of excessive percentages of stocks in your portfolio.  But please note that zero percent of stocks is also a bad option as bond funds impose their own significant risks and many stable value funds now provide return less then 5% which means less then 2% after inflation.

Historical data for most common in 401K plans funds are available from Yahoo free of charge. Still unfortunately very few professionals ever perform even a primitive Excel modeling of the their 401K portfolio based on past data for a representative period of time (let's say ten years). And that despite the fact that it is their own money. It really pays to understand stocks and bonds asset allocation strategies even it cannot predict the future.

Like Monsieur Jourdain's discovery that he has "been speaking prose all my life, and didn't even know it!" in famous Moliere  play you might not suspect that you have one, but that does not matter. Absence of strategy is a strategy too. Here is a very apt question: Money Magazine, Ask the Expert The right return - Aug. 22, 2006:

QUESTION: I always hear financial advisers say, "If you assume an 8 percent to 10 percent annual return in your 401(k)..." before they go on to tell you how much you'll have when you retire. All the 401(k)s I've ever participated in have hovered around the 1 percent to 2 percent range if not negative territory. As far as I can tell, the numbers are fantasy. Am I missing something? - Jordan P., Cincinnati, Ohio

You can appreciate a very fuzzy answer if you read the columns: the so called "expert" provided no solid statistics about average performance of 401K accounts, just hand wavering. When Vanguard looked at the performance of retirement plan participants in June 2004, the portfolio of the mean participant had gained only 2.7 percent annually over the previous five years, just barely keeping pace with inflation (see 401(k) performance raises concern on Soc. Sec. accounts - MarketWatch). That means that you actually can beat 40% of 401K participants using stable value fund. It also shows clearly the extent of the rape of 401K participants by financial industry.

I would argue that independent of whether you take my advice for granted or not (you better not: skepticism is a virtue) your 401K strategy should be defensive, as this casino is definitly stacked against little guys. Not gaining exorbitant returns (double digits returns that are often advertised in "make money fast" books and publications) but protecting your money from losses should be the major goal. Please remember this figure --  2.7%. That's what you should expect if you are not very careful, taking into account your own mistakes and predatory nature of mainstream financial advice. In this sense getting 4.5% as a typical stable fund provides is a 66% improvement over typical returns. 

The stock market casino, precisely like the casinos in Las Vegas, is a very simple machine. The odds are with the house – always and forever. Customers bring in tons of money and they leave a large portion of it to operators, thinking that they had a really good time. There are too many things that are stacked against owners of  401k accounts. First of all mutual fund industry instead of being a part of the solution is a part of the problem (in a sense that access to Treasury Direct in 401K accounts might actually improve returns).  After all, any mutual fund needs to provide a decent living for owners and staff. There are some incentives too and meeting them like in any business means bonuses and that screw behavior in major way and at your expense.  As Justin Fox wrote, long ago in the paper Is The Market Rational? No, say the experts. But neither are you--so don't go thinking you can outsmart it. - December 9, 2002:

[T]he argument of modern behavioralists includes a crucial observation that wasn't in Keynes -- that professional investors are now under so much pressure from their customers that they cannot make the kind of long-term bets that might beat the market. If they do, as was the case with a lot of value-oriented mutual funds in the late 1990s, they can soon find themselves without any customers' money to invest. That gets us to a world in which an investor with enough staying power and contrarian gumption can beat the market, but the vast majority of mutual funds and hedge funds don't.

What happens after bonus is granted does not matter that much. Once characterized as long-term investors, most fund managers can now be fairly described as short-term speculators. Generally there is a distinct tendency to emulate the corporate world: to provide very plush living for those at the helm at investors expense. You would be hard-pressed to find any large financial services company which has not been implicated in the fleecing of investors one way or another. 

Like in gambling among typical mistakes that 401K investors make are over-diversification (spreading your money all over the table, between superficially different mutual funds) and over-betting (on stocks, especially during the bubbles). In the first case you suffer from high transaction costs (each fund has maintenance fees) in the second you rely on pure luck.

There is also tremendous implicit power of mutual fund industry that gives them the ability to block any reforms. That's why 401K investors are really swimming in shark infested waters. Being slightly parasitic institution the stock market casino produces nothing, no actual value. Employees make a living, executives purchase bigger and bigger mansions and more expensive cars, but the net result is that it acts like an "oligarchy tax": at the end a sizable chunk of investors money are confiscated and redistributed feeding the rapid growth of US oligarchy.

In his book Unconventional Success the manager of the Yale University endowment fund David Swensen gave an interesting assessment of the industry which in his opinion "lead to behaviors that line the pockets of mutual fund managers at the expense of the individual investor;"  He thinks that "colossal failure of the fund industry carries serious implications for society, particularly regarding retirement security for America's workers;". Moreover industry is "seriously impairing the level of resources available to support future generations."  This book is an interesting read if you want to know details how "Full Service" brokers and the majority of mutual funds pillage the small investor's accounts, but most information is available free on  the Internet in "after dot-com bust" articles.  There are also many similar books (like Wall Street Versus America).

Hedge funds is another and  very interesting recent phenomenon. Some of them got at the center of sobering NYT assessment. BTW hedge funds stock market now account for approximately half of all trading on the New York and London exchanges. Taking companies private is another recent fad and there are huge amount of money involved in leveraged buyoffs. Amount of money that was  put in LBOs are many times bigger that the amount of money that was invested by venture capital during dot-com bubble.

After reading all this it is easy to slip into negative mode. Still the key point made above is not frighten and depress anybody, but to stress that IT professionals in general and programmers in particular should pay more attention to 401K funds allocation decisions. It is not that difficult to read a couple of good investment books and learn to use Excel. And it definitely helps to avoid repetition of sad story of the last boom-bust cycle when a lot of professionals lost substantial portion of their 401K due to overinvestment in risky internet-related stocks and funds.  It was the running joke at the time that 401K had turned into 101K.

In Bear Market Etiquette the problems with Wall Street  systematic distortion of information were summarized  in the following way:

After a spectacular year-long rally in the stock market, investors are exuberant. Stock market bears have become an endangered species, but reports of their extinction are greatly exaggerated. Indeed, there are many reasons to believe that a return to bear market conditions may be imminent. If the markets turn down again, it won't be pretty but bearish investors may be able to harvest impressive profits by betting on lower prices.

Regardless of market conditions, most investors are overwhelmingly bullish. They have been trained to hold stocks through thick and thin. The bear market of 2000-2003 proved that the average investor will hold stocks through devastating declines, much like a deer in the headlights. Few investors are even aware of techniques such as short selling, put options, or inverse funds that allow profiting within bear markets. For savvy traders, a fast moving bear market can provide stellar profits using these techniques. But a bear market implies that most investors are losing. Severe losses can lead to extreme resentment against those traders who profit from these environments. If you are a profitable bear trader, you should be sensitive to those who are losing while you are winning. In a very real sense, the money that you are making is the money they are losing.

Cocktail conversations about stocks are typically brag sessions about being long a stock that went to the moon. When was the last time you heard someone brag about a spectacular short sale? The next time you are at a party, try telling your best short-sale story and see what kind of reaction you get. Hopefully, your friends will be polite.

The most popular form of bear market investing is short selling, a practice where the investor sells borrowed stock from a broker with the obligation to purchase it back later, presumably at lower price, with the profit being the difference between the sale price and the repurchase price. Even though there is nothing illegal or unethical about short selling, it is still regarded in popular culture as a rogue practice. Many people consider it unpatriotic to sell short the country's finest firms and profit from their troubles. Short sellers have always created resentment, particularly during bear markets when the majority of investors have lost large sums of money.

Stock investing is fundamentally an optimistic pursuit. Most people (particularly Americans) have a natural tendency to be optimistic. Short selling goes contrary to that natural tendency. This may be why short sellers are mistrusted. Short sellers are not necessarily pessimistic, they are just identifying a trend and profiting from it.

One of the most famous short sellers on Wall Street was Jesse Livermore who emerged from the 1929 crash with almost $100 million. Jesse certainly caused a lot of resentment among all of the ordinary people who had lost fortunes in the crash. Some even blamed Jesse and other short sellers for the crash. In response to investor outrage, the stock exchanges enacted rules to limit short selling that remain to this day. After the crash, Livermore often received personal threats and was forced to hire bodyguards. Sadly, Jesse lost his entire fortune in a mistimed investment strategy a few years later and eventually committed suicide. The tragic story of Jesse Livermore has become a parable for the "evils" of short selling.

Other well-known bears have been teased and ridiculed during bull markets, then shunned and reviled when their bearish predictions came true. Bearish analyst Jim Grant endured years of ribbing by Louis Ruckeyser on the Wall $treet Week television show during the long bull market. The same Mr. Ruckeyser fired "permabear" analyst Gail Dudack just months before the stock market peak in April 2000. The unfortunate Ms. Dudack disappeared into obscurity just as her bearish forecasts proved correct. Professional stock analysts know that a bearish outlook may permanently ruin a promising career. This may be why bullish analysts vastly outnumber bearish ones. There is little room on Wall Street for a bear.

Stock market bears are always in a battle with a perpetually bullish "Wall Street Industrial Complex". These institutions are designed to sell securities to the public so they are always promoting stocks as safe and sound places to invest capital. Trading commissions by short sellers generate little revenue for the brokerage industry. In fact trading commissions in general are only a small part of investment industry profits. Management fees, investment banking, research, media, and a plethora of related activities make up the big money the investment industry. These institutions need a constant inflow of new capital to survive. Only a continuously bullish marketing message can lure investors to buy these products and services.

This bullish message is reinforced by the financial media who receive the bulk of their advertising revenue from the same industry that is after your investment dollars. They have created 24-hour "news" channels that are really nothing more than non-stop infomercials for stock investing. Most people get their financial information exclusively from these tainted sources. Financial media influence is powerful and pervasive. Most common investors simply reflect the bullish perspective of the information they receive from the media.

It is not the purpose of this article to discourage purchasing stocks. Quite the contrary. Stock investing is an essential part of a healthy economy. But there is a time to buy and a time to sell. The media will tell you that anytime is the right time to buy but will never tell you when to sell. Successful investors listen to the message of the markets, not the talking heads on the cable news network.

Hidden fees and fudged numbers

First of all you should be skeptical about information from mutual funds. As one discussion participants noted in 'Lazy Portfolios' sparkle in '07, but new year brings adjustments - MarketWatch discussion board:

Folks the numbers seldom match.  I have actively managed my mutual fund portfolio for over 14 years.  Every year...I do the numbers and calculate my returns.  The fund companies...all of them fluff the figures.  Some are worse than others and one needs to be careful in which companies they invest in.  I prefer the Fidelity and Vanguard series with a little T.Rowe Price...but they all fudge the actual returns.  A NY Times Business article 2006 exposed this fact two years ago.

So basing your decisions on information about past returns is dangerous as numbers are often fudged.

As one reviewer of  Gotcha Capitalism How Hidden Fees Rip You Off Every Day-and What You Can Do About It  aptly noted:

The driving force behind this explosion of unfair business practices is computer technology and the shift to an online/database economy: economic transactions are essentially invisible now, and it is much easier for profit-driven companies to simply make up a bunch of fees or "service charges" when no actual services are being provided.

... companies have scientifically researched the most effective methods for hiding bogus fees, and what the tipping point are, so that they steal tiny amounts from millions of customers, but in ways that these customers either won't detect, or understand. And it doesn't matter if you catch one company ripping you off: they all do it, so there's really nowhere for consumers to turn.

As I noted in the introduction 401K investors by-and-large are feeding financial intermediaries. In a typical bond fund with average return 5% and fees 0.5% the mutual fund share is approximately 10% of returns, the share equal to what landlords used to demand from serfs during middle ages -- 10% of harvest was the usual rent for farming land during this time.  Here we provide the money and still getting the same 10% cut.  If you use a broker with flat $10 fees and you average transaction is $1000 you are paying 2% ($10 to sell and $10 to buy a security).

Last modified: March 13, 2008