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Should Investment Advisory Newsletters Come With A Government Warning?

Sigma Investment Counselors

August 12, 2016

There are hundreds, or maybe thousands, of newsletter writers around the globe.  All of them have a single purpose – to sell you something.

There is a fertile field for stock market newsletter writers.  It goes without saying that human beings are wired to seek self preservation.  Numerous articles have been written about the “fight or flight” instinct. Clearly, there is an innate need to be alerted to any looming disaster – be it a Tiger pouncing or a pending financial apocalypse.  So certain investors seek out the “seers” that can warn them of disasters.

In the wild, if one is warned of an attack (pounding footsteps and crackling twigs and branches) then evasive action can be taken.  If the attack does not take place, there is little lost save the energy to get out of the way and hide.  On the other hand, if the warning was not heeded and the attack did occur, loss of life is likely.  It makes perfect sense.

In the financial forest, however, the typical “evasive action” entails liquidating quality investments.  Oftentimes, this generates capital gains, commissions, etc.  If the market correction does not occur, these costs were unnecessary and before positions can be re-established, the market may be higher, resulting in opportunity loss.  Even if a correction takes place, it is often difficult to assess the bottom and get back in at an advantageous time.  Once it is clear that the risk has subsided, the market has typically rebounded well in advance.

Thus, nervous investors find themselves in trouble because they could not restrain their emotions and end up selling at the bottom, buying at the top, and seeing their portfolios dissipate as a result.  Investors of this ilk would do far better by completely avoiding any volatile asset and instead, learning to live on the very modest (sometimes negative) returns of ultra-safe asset classes.

But, one final comment about investment advisory newsletter writers.  While I am certain that there are many that are well intentioned, they know with certainty that they will not succeed in selling their services if they are not bold and provocative.  They must APPEAL TO THE RAW EMOTIONS OF readers in their solicitations and use fear as their primary motivator to get a sale.  Otherwise, their efforts will be fruitless.  While the financial cost to the investor can be significant, the authors of these advisory newsletters are left relatively unscathed.  Who is going to fault them in their desire to protect?

All comments and suggestions are welcome.

Bob Bilkie, CFA®

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