What You Can Learn from this Stockbroker’s Big Mistakes

“Profit Confidential” Column, by Michael Lombardi, CFP, MBA

Ten years ago this coming March 2, 2010, I invested $20,000 with a stockbroker with the instructions, “Invest the money where you feel best.”

This stockbroker was no “slouch.” He’s been a stockbroker for about 30 years and is a branch manager at his office. He also has all the fancy designations associated with being a “high-end” broker.

Why would I entrust $20,000 to a stockbroker as opposed to going it alone? To prove a point. In fact, this was a test. I knew I would do much better investing the money myself. But I wanted this hot-shot broker to prove me wrong, do me better, and teach me a lesson on how it’s done.


Well, it never happened.

It was March 1999 and stocks were near record highs. Before I invested the $20,000, I asked the broker where he would put the money considering stocks were trading so high. His answer was that, over the long term, say 10 years, stock will always move higher. I wanted to put the $20,000 into a gold mutual fund, but the broker thought I was crazy.

With carte blanche, the broker invested my money back in 1999 as follows: a mutual fund with U.S. equities, a U.S. index fund, a Canadian equity fund, a Canadian index fund and a global equity fund (this broker was big on foreign funds at the time).

So how did he do?

I looked at my statement this morning and that $20,000 the broker invested for me 10 years ago is now worth $20,008.44.

The broker totally blew it.

When I did this “test,” I was thinking about my readers and the lessons that could be learned from it. Here are the three lessons:

— Stockbrokers who work at large brokerages are not the smartest investors. If they were, they would be making so much money investing their own funds they wouldn’t need the commissions they make off selling stock to investors.

— Stocks do not go always go up in the long term. To me, 10 years is long term.

— You can’t just buy a group of mutual funds and leave them for 10 years without adjusting your portfolio for the changing economic times.

This broker would have been smarter to take my $20,000 in 1999, invest it in a money market fund — because stocks were very expensive in 1999 — and then re-invest the money into equity funds once stock came down in 2001 and 2002. He would have also made more money himself by moving the $20,000 in and out of different mutual funds as the economic times changed around us, as opposed to just having the money sit there.

I guess I’m $8.44 richer today than I was 10 years ago. But if you take inflation into account, this broker really put me in the hole. Maybe that’s why 10 years ago was the last time I ever trusted a stockbroker.

Michael’s Personal Notes:

That $49.00 drop in gold bullion prices Thursday…enough to scare the latecomers to the gold bull market off? You bet. I had more calls and e-mails from readers and friends last week, scared about their gold investments, than ever.

Sure, I can understand. They watched gold rise from $300.00 to $1,100 per ounce. Latecomers, who do not want to miss the party, jump in and buy gold and gold stocks. So do the speculators, as they’ve now figured out that gold has risen in price for the past nine years in a row.

Then bang. Gold falls sharply and all the speculators and new players in the gold party start running for the door. Well, that’s exactly how bull markets are supposed to work. Move the price of a commodity or stock higher, do a sharp pullback once in a while, then move it back up again. The higher gold prices, the sharper the pullbacks will be. When too many speculators and investors join a bull market, they need to be washed out.

Where the Market Stands:

The Dow Jones Industrial Average starts this week down 3.9% for 2010. Sounds like a big decline, but we are talking only 415 points.

I did a lot of reading this weekend and the confusion about the stock market’s direction is intense. The old-timers say the rally that started in March 2009 is over. To them, I say you need more patience. There are advisors out there saying the Dow Jones is taking a breather before moving to new record highs. To them, I say the high of 14,164 reached by the Dow Jones in October 2007 will not be seen again for years to come.

After a rally that lasted 10 months, which brought stocks up more than 60%, isn’t a rest, a pause, or even a correction in the rally not warranted?

What He Said:

“I see a deal when it’s a deal. And right now there’s a good “for sale” sign flashing on gold bullion and gold producer shares. In fact, after peaking at the $690.00 an ounce level earlier this year, gold could be a bargain at its current price of around $650.00 per ounce. As a reader, you are undoubtedly aware of my negative stance on the general stock market and the U.S. economy. As the economic problems that continue to brew in the U.S., as these problems develop into others, and as they are finally exposed, what other investment but gold will worldwide investors turn to?” Michael Lombardi in PROFIT CONFIDENTIAL, March 14, 2007. Gold bullion was trading under $300.00 an ounce when Michael first started recommending gold-related investments. Many gold stocks recommended in Michael’s various advisories have posted gains in excess of 100%.