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The Lies That (Some) Financial Advisers Tell

Written by Nickel - 9 Comments

I recently ran across an interesting article by Ric Edelman in Bottom Line/Personal (no link, sorry). In it, he ran down a list of the biggest lies that you’ll hear from a financial adviser, and how they could cost you money. What follows is a synopsis of that article, along with some thoughts of my own. While it may be a stretch to call some of these things “lies,” they certainly can be misleading.

You should rebalance your portfolio once a year.

In truth, Edelman argues that once per year isn’t enough. Because market fluctuations can knock your portfolio allocation out of whack, it’s important to periodically rebalance it. But if you blindly choose a specific date, Edelman worries that it might wind up being the wrong time of year, or that you might have waited too long to react to a significant shift in the market. Rather, you should rebalance as soon as any investment category shifts by a predetermined amount. The example that Edelman gives is a target allocation of 10% in small caps. If your portfolio drifts to the point that you’re now holding 8% or 12% in this category, you should consider rebalancing to get back to the 10% target.

All in all, this makes sense, and it helps to ensure that you are selling high and buying low. The only real ‘gotcha’ here is to be aware of the potential tax consequences. In particular, rebalancing by buying/selling in a taxable account could result in a nasty surprise come tax day. An alternative strategy would be to simply shift your contribution amounts such that you are buying more of one class and less of another until things get back in line. Another option would be to use so-called Target Retirement funds, which automatically adjust to track an age-appropriate allocation.

You should shift all of your accounts to more conservative investments as you approach retirement.

Instead of using your retirement date as the guiding force, you should focus on when you expect to start tapping into a certain account. This makes sense to me because retirees are living longer than ever before, and shifting to an overly conservative mix too soon could easily cause you to run out of money before you run out of days. According to Edelman, you should maintain a more aggressive investment mix in accounts that you won’t be tapping for seven or more years, whereas you should to an increasingly conservative mix after that until you’ve achieved the desired conservative stance about three years before the anticipated withdrawal dates.

The stock market will crash between 2017 and 2024.

The logic here is that when baby boomers start retiring in droves, they’ll start liquidating their stock holdings. According to Edelman, however, there’s no reason to think that this batch or retirees will be too different from those that have gone before them. Thus, he expects them to gradually liquidate holding as needed, rather than staging a massive sell off.

Retirees who focus on investment income should focus primarily on interest-yielding bonds and CDs.

According to Edelman, this strategy causes your income to fluctuate too much, depending on the vagaries of interest rates. If rates fall, you’ll have less cash coming in and will have to scale back your lifestyle. While creating a CD ladder can help smooth out interest rate fluctuations, but if you spend out the interest every year then you’re exposing yourself to inflationary risk (i.e., your principal won’t increase, so your interest won’t increase even though prices will).

Edelman recommends adding dividend-paying stocks the income portion of your portfolio. If the resulting income isn’t sufficient, you’ll be able to sell a portion of your assets that have (hopefully) appreciated. Of course, there’s also the risk that your stock won’t appreciate, and you’ll be stuck in the same pickle.

Try to have enough saved up to pay for college based on the projected costs based on when your kids will matriculate.

The danger here is that college costs will continue to rise while your kids are in school. Thus, if tuition is $30k/year when your child starts school and prices continue to increase at 7%, the total cost will be $133,198 rather than $120,000.

Of course, this assumes that you want to pay for your kids’ (or grandkids’) college in the first place. But assuming that you do, it’s something to keep in mind.

[Source: The Truth About Money by Ric Edelman, Bottom Line/Personal Vol. 28, No. 22]

Published on November 30th, 2007
Modified on May 27th, 2009 - 9 Comments
Filed under: Planning, Saving & Investing

About the author: is the founder and editor-in-chief of this site. He's a thirty-something family man who has been writing about personal finance since 2005, and guess what? He's on Twitter!

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9 Responses to “The Lies That (Some) Financial Advisers Tell”

  1. 1
    Mrs. Micah Says:

    I like the way you and he describe portfolio rebalancing–paying attention to difference from the goal and then rebalancing by adjusting your buying pattern. That makes a lot of sense to me. How often should one check on that kind of thing? I mean, once a year is a rule of thumb–but if you’re doing it this way then perhaps 3-4 times per year?

  2. 2
    nickel Says:

    There’s no reason you can’t check it monthly, and then just act when necessary.

  3. 3
    Mrs. Micah Says:

    True.

  4. 4
    Swim Upstream to Wealth Says:

    I sometimes think Edelman talks about more frequent rebalancing because he advertises the fact that his firm looks at daily rebalancing, which he calls “unheard of” in the industry.

    The reality is frequent rebalancing can hurt your performance due to the tax ramifications and transaction costs.

    Using the small cap example, you may find yourself rebalancing five or six times a year if you try to keep a 10% allocation, especially if you rebalance if the allocation moves to 8% or 12%. Just look at this year. The markets went down 6% in August, then rose until November, then went down another 8%, and are up 5% again. The markets trade within ranges for most of the year. This will result in numerous trades for very small fluctuations.

    I only rebalance either annually or if an asset class deviates by more than 5% of the portfolio. So if my small cap exposure should be 10% and it jumps to 15%, I will look to rebalance. I still might not if I am looking at a short term capital gain. Also, if I am doing an annual reblance and my 10% allocation to small cap is currently 11%, I won’t rebalance. It isn’t worth the trading costs and tax consequences.

  5. 5
    Bill Perforce Says:

    According to William J. Bernstein, author of The Four Pillars of Investing, you should only rebalance every two to five years.

    His logic is this: The purpose of a diversified asset allocation is to allow assets that move differently from each other to do just that, move differently. Rebalancing is the “idiot-proof” way of selling high and buying low. However, one year to the next, an asset is likely to repeat its performance. Over two or more years, it is unlikely to repeat its performance. Therefore he concludes that reallocating more frequently than every two years reduces the likelihood of selling after a run-up and buying in a trough.

    All that said, I agree with Edelman’s advice (as you present it). Despite many trusted sources asserting that market timing is a fools errand, I can’t help but think that if you are following an investment schedule, either putting money into an asset, taking it out, or rebalancing among or between assets, you can “time” your action to market behavior within your allowed period. That is, if your plan calls for a rebalancing in a six month window, you can watch for a precipitous drop in the asset class you intend to buy or a run-up in an asset you intend to sell.

    I only read Four Pillars very recently and have been rebalancing more or less quarterly, but I’m going to knock that off! Now I have to do at least one re-allocation, now that I’ve read his book (and bought his story), but that’s different than rebalancing.

  6. 6
    Living Off Dividends Says:

    i’m sending my kids to canada for college!

  7. 7
    megan Says:

    Speaking of stupid advice financial advisors provide…

    My husband’s cousin and her husband just bought a brand new Chevy Durango (on a loan) off the lot because their “financial advisor” told them it would be a good idea…to prepare for their future family.

    They: are brand new marrieds, less than six months; don’t have a college degree between them; are not currently attending any kind of job/skills training programs; both have to travel 20 miles each way to work each day (high fuel costs + SUV = yikes!) for customer service jobs; already have other sources of consumer debt; are not even planning on starting a family for a while yet to come.

    Am I missing something, or does this seem like pretty crappy advice?

  8. 8
    ZOok Says:

    Megan-

    Sounds like bad advice, but maybe your husband’s cousin was hell-bent on having an SUV? Something doesn’t add up with the story.

    Why did they go to a financial planner to begin with? To find out if they could afford a huge, expensive SUV with crap income?

  9. 9
    megan Says:

    ZOok-

    We have no idea why they went to a financial advisor. We hope it was with the intent to try to improve their situation…but it kinda sounds like they found the wrong guy to help with that.

    We’ve been hoping for the best for them but they keep giving us more reason to doubt than hope. But here’s to hoping!

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