Why You Believe Lies

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Here's a subject of endless fascination for me. The securities industry is premised on a series of lies. The most pernicious one is that it can help you plan for retirement by "managing" your money.

The reality is quite different.

Do this comparison

Let's assume you didn't use any broker to "assist" you with your portfolio. Instead, you invested in Vanguard's LifeStrategy Moderate Growth Fund (VSMGX). That fund invests 60% of its assets in stocks (including international stocks) and 40% in bonds, including international bonds. If this asset allocation isn't suitable for you, you could invest in one of the other LifeStrategy funds, which offer both more conservative and more aggressive asset allocations.

A 60/40 asset allocation is suitable for many investors. Many defined benefit plans (remember them?) used this allocation as its default because of its general applicability.

Since inception on September 30, 1994, the Moderate Growth Fund had an average annual return (as of December 31, 2016) of 7.48%. You can find returns for other periods here.

Now, let's do this simple experiment. Check your statements. Compare your returns to the returns of this index-based fund. I strongly suspect you underperformed, relying on the "insights" of your broker, who probably engaged in stock picking, market timing and recommend expensive, actively managed mutual funds.

Curious behavior

Not only did your portfolio likely underperform, but you continue to rely on brokers who have undisclosed conflicts of interest, which they can (and often do) resolve in their own favor. And let's not even discuss the shocking ethics of these firms, who have been subject to innumerable criminal and civil actions, reflecting their utter disdain for your best interest.

The Securities and Exchange Commission complied a list of enforcement actions addressing misconduct that led to or arose from the financial crisis. You can find it here.

Why you believe lies

Curiously, despite their shocking, illegal conduct, investors continue to entrust their life savings to their care. Why do you believe their lies?

A recent article in Politico addresses this subject.

Initially, when confronted with a lie (like "you can trust us to manage your money in your best interest"), we accept the lie as true, because only then can we evaluate it. When the lies are compounded ("We have the ability to pick outperforming stocks"), our brains experience what is known as "cognitive load." The brain becomes overwhelmed by the effort involved in debunking a steady stream of lies, causing us to "just give up trying to figure out what's true."

When the lies are repeated, the brain recalls the lie and it becomes part of our reality. As noted by Politico: "Repetition of any kind--even to refute the statement in question--only serves to solidify it."

It turns out that "false beliefs, once established, are incredibly tricky to correct."

Keep this in mind the next time your broker offers to "help" you reach your retirement goals.

The views of the author are his alone. He is not affiliated with any broker, fund manager or advisory firm.

Any data, information and content on this blog is for information purposes only and should not be construed as an offer of advisory services.

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