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logo    Income, Ifcome, and Wishcome-Investing in the Market


The Autumn 2005 issue of Fidelity Investments' Stages was delivered this week. Except for an article on how the consumer price index is calculated, it is a verbal tempest amounting to a trifle.

This publication is always a mishmash of hunches passed off as advice, anecdotes that signify nothing, suggestions so heavily qualified that they are meaningless, and even downright contradictions, all of which comes cloaked in the regal robe of financial planning.

An article entitled, The Insight [sic] of 1,000 Millionaires , (could these thousand individuals really have had only one insight?) describing an interview with author Jim Trippon, contains the following statements:

1.         You can build wealth by developing a game plan and sticking with it.

2.        . . . IRAs can be powerful tools. . . .

3.        So, if you can save money on a pre-tax basis and let it grow tax deferred, that may significantly boost your rate of return.

4.        A professional financial adviser might help you preserve your wealth.

Well, at least he got the last sentence right grammatically. Note that none of these sentences contains the verb 'will,' and the subjunctive 'might' clearly implies doubt and unreality.

Another article, 7 Things You Need to Know About Sector Investing is also full of highly qualified sentences, which makes me wonder how one can know something that is so highly uncertain.

1.         . . . a proper mix of sector funds may help long-term, diversified investors pursue above-average growth, and may at times serve as a hedge against downside exposure.

2.        Investors . . . may feel a sense of comfort by allocating assets to industries they know something about.

3.        A sector fund strategy may be suitable for any investor. . . .

The writer of that article apparently never learned the use of the subjunctive mood in the English language, since all three of these sentences are rife with doubt.

There are many more of these highly and incorrectly qualified sentences in this issue of Stages , such as,  ". . . saving money today can put you on a path to a more comfortable retirement." But will it?

And then there is this downright nonsense. In The Inflation Trap, the author rightly points out that using average inflation rates is not a good way of trying to estimate the income needed at retirement, but on the following page uses average market returns to justify investing. But if average inflation is not a good way of estimating the amount of money needed at retirement, how can average returns be an effective way of estimating the returns that one can expect? Is this guy mentally challenged? Of course, to give credit where credit is due, he does write that " . . . no strategy is guaranteed to deliver a profit or protect against a loss," and "Remember that past performance does not guarantee future results." Goody-goody!

So what's the real skinny on investing in the market? Here are some truisms:

1.        Investing in the market is not a form of saving; it is a form of wagering.

2.        Exactly like gamblers who develop systems for beating the odds, financial managers develop strategies for beating the odds, and strategies do not work any better for financial managers than systems work for gamblers.

3.        Forget the long-term; it is a meaningless concept. The long-term always starts tomorrow. A person who has been investing for say thirty years will need his nest-egg tomorrow, but the market crashes today. To tell him the market will recover over the long-term is no consolation whatsoever. His thirty-year long-term counts for absolutely nothing.

4.        Don't even think about averages. The average return is something that no one gets. And given the nature of averages, except for the one special case in which the average equals the median, there always are more entries below the average than above. So whatever the average is over some period of time, expect to get something considerably less, because the odds are that any specific investor will fall into the below average part of the list.

5.        Hugh numbers of people investing monthly in the market artificially inflates the values of stocks. All of this 401 and IRA stuff simply gets more money chasing a limited number of stocks; demand rises faster than supply. The only guaranteed beneficiary is the stock broker. So why then do we do it? The simple answer is that it's the only game in town.

6.        Some is better than none. No method of saving has yet been implemented that guarantees that the contributions made to it will not decrease in value in real dollar terms. Even so-called inflation adjusted plans are misnomers, since the way the CPI is calculated  rarely reflects the true cost of living.

In The Insight of 1,000 Millionaires , Mr. Trippon is characterized as saying, "The problem is that most people live on what I call their 'ifcome,' not 'income.'" I'm indebted to him for the coinage used in the title of this piece. But it is evident to me that the people at Fidelity Investments are living off what might best be termed the wishcome of investors. Investors, like tourists, throw their pennies into the fountain and make a wish. Sometimes the wishes come true; most often they do not. (11/18/2005)