Tuesday, September 3, 2013

More Buy-High and Sell-Low Advice

Here’s a quote from Andrew Allentuck in this weekend’s Financial Post:
“If you are paying more in management expenses and commissions than you get in dividends and capital gains over a period of three to five years, consider changing portfolio mix or managers who created the mix.”
Basically, this means “if your portfolio goes down over three to five years, make a change.” This is bad advice in a couple of different ways:

1. During most three to five-year periods, this is a very low standard. If the markets rise by 5% per year over three years and your investment fees consume this entire gain and more, you’re paying wildly excessive fees.

2. Most times that stock markets have a serious correction, the three-year return will be poor. Allentuck’s advice has you making a change when markets are down. Investors tend to seek safer investments when stock markets are down. This advice drives buy-high and sell-low behaviour which is devastating to long-term returns.

Investors would be much better off to minimize fees during good times and bad. They also need to choose an asset allocation with volatility they can stomach and then stick with it through market drops.


  1. Good points, Mike. I hear this kind of advice frequently. The implication is that high fees are acceptable when returns are high. By extension that means if the manager earned better-than-market returns, the extra cost was worth it. That is technically true, but it can only be known in hindsight, so it's no basis for a strategy going forward.

    1. @Dan: Thanks. This sort of advice would be more palatable if it included a comparison to the market (but still not good enough as you say), but that's not the case here. As long as after-fee returns are positive, the implication is that high fees are fine.

  2. Wow. Is he really saying it's okay to have a portfolio earn nothing over 5 years?! Market collapse or not, that's a very long time to not see any profit. I'll have to go read the article to see what context he's using. If the portfolio is properly set up with fixed income as well as stock market selections, I don't think it should be possible to have 0 gain over 5 years, market damage or not.

  3. I agree with Bet Crooks. 0 on 5? Not a chance. AA seems to have published some bad advice. everyone needs a personal benchmark, and should said investments fall below, then time to add some research to get back on track. Up front research cannot be overstated here. Proper research provides the basis for successful long term decisions. - cheers.

  4. @Bet Crooks and @Anonymous: Stock indexes making nothing in 5 years is rare, but not unheard of, particularly when we get to start at any point in the year. If you look at the very bottom of some of the big market drops in history, sometimes the low point is lower than the market level 5 years earlier. This is why I think this advice will drive people to sell at the worst times.

  5. I agree that selling might only increase the problem.

    After reading the article, I still am not clear exactly what scenario he's trying to capture. If it's a portfolio of an "entire-Cdn-market" index; entire-US-mkt index; large-part-of-the-global-market" index and no fixed income, I guess it could return 0 after 5 years. Still seems appalling bad to me though, and as you said from the outset, his advice seems to just worsen things.