Playing to Fear, Not the Plan

After combing through what’s become a lengthy “future blog topics” list for this week, I was sidetracked by the recent onslaught of advertising by the world’s largest asset manager, BlackRock.

I don’t have anything against the firm, per se.  They aren’t managing more than $3 trillion just by accident.  It’s just the message behind their most recent ad campaign seems to be a perfect example of what we try to warn against on a regular basis; Wall Street playing to investors’ fears.  Even in a market that has been more positive than most might have expected since the fourth quarter of 2011, the message persists; what are you afraid of and how can I create a product to sell you that answers that fear? 

What’s wrong with that process?  In traditional business, absolutely nothing.  Our society has been built on the successes of those producing products to fit a need.  However, with investing, the process tends to completely disregard the question of whether or not the product is actually an appropriate investment for the investor’s situation. 

The product answers to fear, it should answer to a plan.

The ad states “2% ISN’T A RETURN; IT’S A RETREAT.”  Ok, I’ll agree.  The return on safe instruments such as cash and short term, high quality bonds are, as can be expected in this environment, paltry at best.  However, that doesn’t mean they don’t play a vital role in your portfolio.  “Mattress money” is meant to be just that, a place to safely store the returns earned on the risk you take in the stock market or other investments. 

What does BlackRock suggest you do?  Try some of their products, of course.  One they mention specifically, the BlackRock High Yield Bond Fund, might certainly boost your expected return, but at what cost?  Well, if you look back to Morningstar as to how the fund performed in 2008, it lost 27.8% of its value.  That doesn’t make it a bad investment, but it’s not something I’d want in my mattress.

Another suggestion is the dividend-focused BlackRock Global Dividend Income Fund.  Dividends are certainly a hot topic of late, and, for all I know, this particular fund, despite its 1% expense ratio (and up depending on share class), may be a perfectly reasonable way to access a global portfolio of dividend paying stocks.  But, just like the High Yield Bond Fund, that doesn’t mean it’s a reasonable replacement for cash or high quality fixed income instruments.

We’ve said it more than a few times in this space, there’s nothing in investing that can’t be boiled down to the relationship between risk and reward, fear and greed.  There are lots of ways to seek out returns that might outperform lower yielding instruments, but not without taking the appropriate amount of corresponding risk. 

What’s more important is to understand why you hold various asset classes, what amounts you hold and how that relates to your tolerance for risk and your long term goals and dreams.  It is our goal to assist our clients with this very important process.  If you ever have questions on how this relates to your plan or know someone who might, please let us know.

Have a great week!

Chip Workman, CFP®

cworkman@taaginc.com

www.taaginc.com