Thursday, September 16, 2021
Why you shouldn't listen to financial advice from your bank
A sizeable chunk of my retirement savings is currently on a simple savings account, where the measly 0.1% interest rate I get is way below the inflation rate. So I am losing money, slowly. And my bank is writing me that they noticed the money on my savings account, and advise me to invest that money in one of their investment products instead. Sounds like good advice, doesn't it? Not so fast!
The large majority of investment advice you get, whether that is from professional bankers or dubious YouTube influencers, is backward looking: Look here, the investment product I am peddling gained this much over the last X months! That argument is very misleading, which is why the SEC actually requires funds to write "past performance is not indicative of future results" in their prospecti. In reality often the opposite is true: If a class of investment had a spectacular run over the last X months, it becomes increasingly likely that a "correction" will happen, if not a downright crash. So if you want to decide whether to invest in shares, you should look at the Shiller price/earnings ratio. This is currently 38.7, compared to a long-term average of 16; only just before the dotcom crash has this ever been higher. If you invest in shares or a fund based on shares now, chances are that somewhere in the next 12 months this correction or crash happens, and you lose a big chunk of your investment.
So why is the friendly banker advising me to invest now? Doesn't he know about price/earnings ratios? Well, it turns out that the banker has a conflict of interest. Because he is paid by the bank, his main goal is to assure that the bank is making money, not me. And my money on the savings account isn't making much money for my bank. If I would buy their investment products, my bank would get the usual mutual fund fees. These fees are completely independent on how well the investment product is doing. In other words, the risk (which they were legally obliged to mention exists) is completely carried by me. If I buy an investment product from them and lose my shirt, my bank is still earning the same money. Advising me to invest is risk-free for my bank, but certainly not for me.
So how about alternative ways of investing? Buying meme stonks on RobinHood? Buying cryptocurrency? Well, I am not saying that one should never do that. But one has to be aware that this isn't investing. It's gambling. My personal experience with gambling is on the positive side: The one week of my life I spent in Vegas I ended up winning $700. But I had determined in advance how much I was willing to lose and set aside a $1000 pool for that. I would have stopped gambling if I had lost that, but luckily managed to win a bit instead. Fun, but not solid investment advice. Meme stonks, cryptocurrency, collectibles, or whatever else you heard on the internet was a surefire way to get rich quick are all gambling. You can win money, but it is far from certain, and most of these products can easily lose far more than a balanced share portfolio during a stock market crash. That is not the right investment product for my retirement savings. Feel free to set aside a sum of money that you could afford to lose and gamble with that, but not more!
Sometimes the best investment advice you can get is to not invest anything now. When you open your newspaper and read about a terrible stock market crash, that is probably the time to invest. Also, with inflation on the rise, sooner or later the interest rates on bonds are going to rise again. The ultra-low inflation / ultra-low interest rate era is a historical anomaly, and can't last forever. And while investment in housing for speculative reasons can be risky, investing in a house you plan to live in for years is relatively safe, if you don't get too much into mortgage debt for that. Me, I'm planning to do just that, and ignore the friendly advice letter from my bank.