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Dennis Smith

For a long time, I have resented that well-studied and strategic financial advice is better and more comprehensively offered to the rich than it is to working Americans. Recently, perhaps to support me in my resentment, I have begun to read rumblings in the financial press about the need to “democratize” financial services. And, so, I have appointed myself as a committee of one to try to show firefighters why their money should be better protected.

A good case in point is that we have just learned that the average 401(k) account declined last year by about 10%, and this is in an environment where 42 million Americans have invested $1.7 trillion in these government-approved accounts. And, get this, in the three years ending in June the Dow rose an average 7% per year, the S&P 500 climbed almost 4% each year and the Nasdaq went up by nearly 5% a year.

So why did the 401(k) money decline by 10%? Because most of those investors put their money in mutual funds, and no one told them they should reevaluate their holdings in a rapidly changing stock market environment. Now, let me assure you that when the rich find themselves in a changing stock market environment, there is always someone who picks up the phone to tell them they have to reevaluate their holdings. These people are called money managers. Money managers are available to you too – if you have a minimum amount in your portfolio, say, a million dollars, or $10 million, or, in many cases, $25 million.

I want to ask you to visualize a pyramid. This pyramid represents all American investors. Now, lop off just a teeny-weeny tip off the top, and in this space you will find Bill Gates, Donald Trump and all the others on the Forbes billionaire list, plus every American multimillionaire and millionaire as well. These are the people who can afford to have experienced, proven money managers handling their investments – men and women who are daily watching and advising about the value of their clients’ portfolios. The great bulk of the remaining bottom of the pyramid are people like firefighters, police officers, EMTs, nurses, schoolteachers and others who hold the fabric of our society together. To me it simply is not fair that they are not getting the kind of day to day financial attention they deserve.

Stock ownership is increasing rapidly throughout the world. Did you know that in America over 50% of all households are now invested in the stock market? In England over 25% of households are invested in the stock market, and almost 20% in Germany and France. And, worldwide, the way financial services are delivered is changing rapidly as well.

“What should I do with my money?” is the question being asked in many languages throughout the world. I have been writing consistently that money should be invested prudently with known people and companies in accounts that are balanced between stocks, bonds and money equivalents, where the principal is preserved and where you are getting satisfactory returns on your investments. Of course, the word “satisfactory,” like the word love, can mean different things to different people, but one thing we know it does not mean is when there is no return at all, but a loss of principal – in the way people lost 10% of the money in their 401(k) accounts last year.

As I have shown, if you were in that teeny-weeny top of the investing pyramid, you would have your money with a proven investment manager. But, what would happen if we changed the symbol for America’s investors from a pyramid to a pancake, so that all investment advisors promulgated their investment advice to all investors and not just the top few? There wouldn’t be any top investors with top investment strategists preserving and growing their capital in an elitist and separate manner, and people might not be losing 10% of their capital in their 401(k) plans either.

Does this egalitarian idea reek of socialism or some other disapproved economic philosophy? No, I think this is just a simple idea about preserving and growing our personal investments based on the concept of fairness, for preserving and growing our personal investments ought to be as American as apple pie, and not as American as yachts, limos and sable coats. But until this pyramid flattens out, most of us will need to monitor our accounts, and although this may take some effort, you don’t need to be a Wall Street guru to protect your accounts from unwarranted losses.

How do you know when you should sell an investment? It isn’t easy and there is no sure-fire formula to guarantee success, but a few guidelines can help. These guidelines are mainly for mutual funds because unless you really know what you’re doing, you should stay away from individual stocks and bonds.

1. Sell when your investment objectives or horizon changes. If you plan to spend the money in three years or less, you should move out of stocks and into fixed-income funds that have less risk of falling in value before you need to the money.

2. Find a new fund when yours does worse than similar funds for two or three years in a row. This is a tough call. It’s bad investment strategy to be constantly changing funds to buy into last year’s top performer because nearly every fund occasionally has a spectacular year. On the other hand, you will miss out on a lot of gains by holding on to a poorly performing fund year after year. Three years should be an adequate time frame to judge a fund’s quality.

3. Replace a fund when its strategy or management team changes. If you bought into a large-cap stock fund that is now investing your money in small start-up companies, you should switch to a fund that more closely sticks to your objectives. Similarly, if a fund gets a new, unproven manager, you should take a hard look at whether you want him or her to be making your investment decisions.