The Real Danger In Overstating Returns (Like PIMCO)

Originally in ForbesAs if PIMCO needed any more bad press, The Wall Street Journal reported this week that the Securities and Exchange Commission is investigating whether the bond giant “artificially boosted the returns of a popular fund aimed at small investors.” While we should all be attentive to the results of this probe—because I’d bet my lunch money that its implications will be felt beyond just PIMCO—there is an even deeper issue to consider. And this issue has a more direct impact on our individual portfolios and money management choices. The real danger in overstating returns, and indeed the root of most financial missteps, is self-deception.


“How’s your portfolio?”

Who among us wants to feel like a failure? We’ll generally avoid experiencing this sensation at all costs. So, absent conspicuous success, we permit ourselves to believe that we’ve at least not failed, frequently through self-deception.

Defining “success” in investing can be an especially tricky endeavor and comes with a number of challenges. Is success attained by  reaching a certain number, or a particular account balance, however arbitrary? Or is success found in earning a particular rate of return? Or outperforming one’s peers or a particular benchmark?

There are so many variables unique to each investor that gauging true success becomes almost impossible. This is where self-deception becomes a handy tool.  It allows us to artificially create and meet arbitrary objectives, resulting in a feeling of progress. And progress, like success, feels good. In a classic scene from the movie Meet the Parents, Owen Wilson’s do-no-wrong character asks Ben Stiller’s still-finding-himself character, “How’s your portfolio?”

As so many do, Stiller responds self-deceivingly, “I’d say strong…to quite strong.” But is it really?

Unfortunately, self-deception is all-too-often our instinctive, default response.

The Financial Industry Fosters Self-Deception

The financial industry encourages confusion among investors by offering a seemingly limitless array of solutions and strategies. These solutions are marketed in a way to foster self-deception and lead investors to believe they are pursuing real success. Unfortunately, those who manage money have an even greater incentive to deceive themselves.

Maintaining an unwavering belief in the virtues of their investment philosophy is what helps money managers continue to attract new clients. It’s an act of self-deception driven by the most powerful human impulse—self-preservation.

I have seen many gross examples of the industry’s imperative for self-preservation. Some of them border on the hilarious. Once I was invited to a conference at a swanky hotel in Las Vegas. A number of the world’s most expensive platform speakers were on the bill. It didn’t take long to see that the whole event was sponsored by a large company whose business included acting as a middleman for financial advisors that sold equity-indexed annuities (EIAs) offered by insurance companies. The company took an “override” commission on every piece of business placed, so they worked tirelessly to brainwash advisors to see themselves as “the safe money experts.”

Advisors were swept into willful blindness by the siren’s song of double-digit commissions. They eventually talked themselves—and their prospects—into justifying the sale of products with surrender charges in excess of 10% that lasted for a decade or more.

Even more dangerous, however, is a less noticeable variety of self-deception. Take the money manager, for instance, who has convinced himself (and his firm’s investment committee) that beating the S&P 500 stock index over the past 14 years was a stroke of brilliance, all the while underperforming a simple, diversified blended benchmark. For an industry that has so consistently failed to add value during the investing process on behalf of its clients and customers, self-deception may be the only way for many to get a good night’s rest.

A Better Way

Fortunately, there is a better way. Investors, advisors and money managers alike can choose intellectual honesty. We can set in place deliberate systems of accountability designed to check and balance tendencies toward self-preservation through self-deception. We can choose evidence over opinion. We can choose transparency over sleight of hand.

We can redefine success by centering our planning on the values unique to each investor, and developing an evidence-based strategy tailored to an individual’s goals and objectives.

I’m a speakerauthor and director of personal finance for the BAM Alliance. If you enjoyed this post, let me know on Twitter or Google+, and click here to receive my weekly post via email.

Back to School — Back to Financial Fundamentals for 3 Generations

Originally in ForbesAs kids head back to school, adults spanning several generations set their sites on getting their financial house back in order.  What are the most important financial planning considerations in three major demographics—Millennials, Generation X and Empty Nesters?

Millennials:  First things first – Before making any big financial commitments, like buying a house, figure out what you want life to look like.


  • Are you in a relationship and looking to “settle down,” or do you highly value freedom and flexibility?  If the latter, you shouldn’t be buying a house or committing to a job that is geographically tethered.
  • If you’re in your twenties, the primary factor that will influence your financial success is how well you establish yourself in a career.  Invest in yourself, and that will likely help you invest more money in the future.
  • Save as much as you can in tax-qualified retirement accounts at this phase of life, because once you get settled down and have kids, your expenses will rise dramatically.
  • Don’t default to 100% equity portfolios just because you’re young.  After getting burned by the market crash of 2008, many Millennials got scared away and didn’t benefit from the subsequent market rise.  Your portfolio should likely be predominantly stocks at this age, but consider some fixed income exposure to keep from losing your shirt (and abandoning your strategy) in a downturn.

The Top 10 Places Your Next Dollar Should Go

Originally in ForbesThere is no shortage of receptacles clamoring for your money each day. No matter how much money you have or make, it could never keep up with all the seemingly urgent invitations to part with it.


Separating true financial priorities from flash impulses is an increasing challenge, even when you’re trying to do the right thing with your moola — like saving for the future, insuring against catastrophic risks and otherwise improving your financial standing. And while every individual and household is in some way unique, the following list of financial priorities for your next available dollar is a reliable guide for most.

Once you’ve spent the money necessary to cover your fixed and variable living expenses (and yes, I realize that’s no easy task for many) consider spending your additional dollars in this order: 

My bad! I was wrong about rising rates and bonds

Originally published CNBC

“I was wrong.”

There are few words strung together that possess such power to free us. In less than a second, we’re able to reconcile the inconsistency between our previous conviction and the apparent truth. Humbling, yes, but also strangely euphoric.

Well, I’ve earned the opportunity to claim said euphoria, as I must confess that I had bought into the most prevalent myth du jour surrounding bond investing. You’ll forgive me, I hope, because this misconception—like all of the most powerful ones—is especially deceptive because it’s grounded in half-truth.


Let’s be quite clear: Rising rates simply do not guarantee negative bond returns.

Why Beating The Market Is An Uphill Skate

Originally in ForbesIt is absolutely possible to beat the market, just as I’m sure it’s possible that someone could climb Mt. Everest in a pair of roller skates.

It is so improbable, however, that it’s rendered a fruitless, if not counterproductive, pursuit.

After 16 years in the financial industry and seeing countless great investors eventually humbled by market forces they could not control, I’ve finally relinquished my skates.


What You Can Learn From Bill Gross And PIMCO’s Troubles

Originally in Forbes“Trouble. Trouble, trouble, trouble, trouble.” Reading all the news about Bill Gross and PIMCO, I keep hearing that Ray LaMontagne song in my head. (Go ahead—give it a listen while you read this, just for fun.)

The king of bonds isn’t yet abdicating the throne, but it’s been a rough stretch since PIMCO came down from the mountain to translate the etchings on the “New Normal” tablets. It was, of course, hard to argue the logic in 2009, that U.S. markets would struggle under the weight of a sluggish economy hampered by high unemployment and systemic government debt. But as it often does in the face of supposed certainty, the market defied man’s expectations.


Allocating Your Most Valuable Asset—You

Originally in ForbesWhat is your most valuable asset? Your home? Not likely, even back in 2006. Your 401(k)? Doubtful, even when it was 2007. No, if you’re not yet glimpsing your retirement years, it’s likely that your biggest asset is you—and not just metaphorically.

Let’s say you’re only 30, with a degree or two and some experience under your belt. You’re making $70,000 per year. If you only get 3% cost-of-living-adjustment raises, you will crest a million in aggregate earnings in just the next 13 years.

Over the course of the next 40 years, over which you’ll almost surely continue working, you’ll earn more than $5.2 million.


The Chances Are Good That Your 401(k) Isn’t

We need not look far to learn that 401(k) plans are imperfect or worse, so instead of lumping on more criticism about how you and your employer have botched your 401(k), let’s discuss how to make the most of a not-so-great situation.



Step 1: Don’t blame shift. There is a time for criticism, so keep reading, but too many people use the imperfections in, or a lack of understanding of, their retirement plan to feed the self-deceptive siren’s call to inaction.