How Do You Know When Not to Listen to Your Financial Advisor?


How do you know when not to listen to your financial Advisor?

The answer …  When your advisor claims that “nobody can accurately time the stock market”, that you should use dollar-cost averaging to buy more shares of declining stocks and that you should invest only in large, established advisor

I say this because financial advisors (salespeople employed by securities brokerage firms) don’t  get paid to provide investors with sound investment advice; instead, they get paid to open new accounts for the firm, persuade investors to put more money into those accounts and to keep their clients fully invested at all times – regardless, of the prevailing investment environment.

If you don’t believe me, I encourage you to try to think of a time that your “Financial advisor” recommended that you sell a stock near its peak, or to get out of stocks in general when the major stock market indices were trading near new highs.

Also, try to recall any times that your advisor recommended for you to sell a stock shortly after its price had begun to decline, instead of advising you to use “dollar-cost-averaging” to purchase additional shares of the stock.

tense clientsLastly, I urge you to try to think of any times that your advisor recommended for you to invest in a relatively unknown and/or new company whose stock was trading near its historic low or in a stock whose underlying company didn’t have a financial underwriting agreement with the investment banking division of the advisor’s employer.

Now, I’m well aware of the fact that many financial advisors claim that “nobody can accurately time the market”, that dollar-cost averaging supposedly leads to higher investment returns, and that investing in relatively new companies is supposedly riskier than investing in large, well-known companies. Yet, there’s no real evidence to support those claims.

In fact, I have correctly forecasted every major turning point in the U.S. stock market since the late 1990s – in other words, I’ve accurately “timed the market”.

For example, I advised investors on September 18, 2007 to get completely out of stocks because my investment models indicated at that time, that stock prices, in general, would fall sharply over the ensuing months.

Eleven trading days later, the S&P 500 Index peaked at what was then an all-time high and then declined by 56.8% over the next 17 months. Fortunately, investors who headed my market-timing advice were able to preserve the value of their portfolios and to even generate gains by investing in inverse-equity ETFs – during that and sell

When I shared the above example with a reportedly successful financial advisor (a very high-income salesperson who’s employed by one of the world’s larger wealth management firms) his response was, “But when did you get them back in the market”, thinking that my answer would be many months after stock prices had bottomed.

To the contrary, my answer was, “Only 10 days after the major stock market indices bottomed on March 9, 2009”.

In regard to the recent downturn in stocks, my firm and I advised our clients to get back out of the stock market on May 6, 2015 – 11 trading days before the S&P 500 Index peaked at an all-time high on May 21, 2015.

frustrated financial advisorSo, whenever you hear a financial advisor claim that nobody can accurately time the market, you should realize that the “advisor” is really saying that he/she might not be able to accurately time the market.

Now, please don’t think that I’m just trying to “toot my horn”, because I’m not. Instead, I’m trying to convince you that if your advisor claims that nobody can accurately time the market, you should probably look for a new advisor who has been successful in timing the market.

That’s because getting out of stocks, bonds, commodities and precious metals near their highs, and getting back into those securities near their bottoms, can lead to substantially better investment performance results than by staying fully invested in the financial markets at all times.

In regard to using dollar-cost averaging to purchase additional shares of stocks, after the prices of those stocks have fallen, I often encourage my firm’s clients to do just the opposite – to sell stocks whose prices decline.

That’s because one of the factors that separates successful financial market participants from unsuccessful investors, speculators and traders is knowing “when to fold” – being willing to sell stocks and other securities that don’t perform in the way that one had expected initially.

Although the use of dollar-cost averaging can sometimes produce profitable investment results, that supposedly wise investment technique can also lead to huge losses.

For example, if you had used dollar-cost averaging to buy more shares of the following stocks after their prices had declined, you would currently be sitting on some massive losses and with a very minimal chance of ever generating gains from those securities: 3D Systems (DDD), GoPro (GPRO) and Twitter (TWTR).3d systems

By the way, the same wealth-management firm that employed the financial advisor that I referenced earlier in this article, recommended for the firm’s clients to buy 3D Systems on September 23, 2013 when the stock was trading at $53.75. Since then, DDD had declined by 80.5% as of this past Monday.

In regard to investing only in large, established and well-known companies whose stock prices have risen sharply, instead of investing in relatively new companies whose stocks are trading near all-time lows, I urge you to keep the following in mind: Proctor & Gamble (PG), Coca-Cola (KO) and General Electric (GE) depreciated by 39.0%, 40.4% and a whopping 82.7% (including dividends) during the 2007-2009 stock market meltdown.

In contrast, Lumber Liquidators (LL), which didn’t begin trading as a publicly-held company until November 9, 2007, declined by 33.4% during the 2008-2009 downturn. While that’s still a big drop, it’s less than the declines in the supposedly “defensive” stocks mentioned above.

And, while PG, KO and GE appreciated substantially from March 2009 to the end of 2013, returning 114%, 148% and 340% (including dividends), respectively, during that period, LL rose by a monstrous 1,364% during that same period.

stock selectionSo, I don’t recommend you to exactly listen to advisors who claim that investing in relatively new companies is riskier than investing in large, established companies. The important point is to know when to get in and out of those certain securities.

In closing, here’s something else your advisors might not have ever told you – many of the stocks that financial advisors recommend for purchase are stocks of companies that have investment banking and/or financial underwriting agreements with those advisors’ employers.

Largely as a result of those “conflicts-of-interest” agreements, wealth-management firms almost never have a “sell” rating on the stocks that their advisors are allowed to recommend to clients. Quite the contrary, a study conducted by Standard & Poor’s during 2011 found that only 0.08% out of the 19,868 equity research reports prepared by Wall Street analysts gave the companies discussed in those reports a “Sell” rating.

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Until next time,

David Frazier

David Frazier is President and Chief Market Strategist of Frazier & Mayer Research, LLC, an independent investment research firm that offers customized research and analytical services to registered investment advisors, hedge funds and high net-worth individual investors. You can check out his latest insights at:

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