Investors Are Being Trapped, And They Don’t Realize It

The worst trap is the most inviting one. This investment trap is no exception. In the next 5 minutes, I will describe it to you and explain how you can easily avoid it.

In case you haven’t met me yet, my name is Roger Conrad. I’m writing to you now from my home office in Virginia, as a 35-year veteran of the investment advisory business, the past decade as a managing partner at the company Capitalist Times.

I understand the investment world better than most, and I especially enjoy sharing what I know with people like you so that you can build your own wealth by investing.

That’s why I have to tell you about an alarming trap that’s being set for unwary investors.

Too many have already fallen for it. I hope to save you from that fate.

When I began my career in the mid-1980s, most people handled their own investments. Most stock market trades were still made by individuals. Some had much larger sums to invest than others. And many relied on the advice of trusted stockbrokers to gather information and help out with decisions. But people generally made their own decisions—buying stocks they thought would generate good returns, with capital gains, dividends, or in the best cases both.

But times were already changing fast. The Reagan administration had greatly reduced financial system regulation. So the big investment firms saw an opportunity to grab a far bigger piece of the industry revenue pie than they had before—by controlling investors’ money, rather than simply providing advice and facilitating trading.

A marketing deluge helped convince many investors that they were in too deep, and would be far better off giving up control—instead putting their money into mutual funds sponsored by the big investment firms, and supposedly managed by better informed and more capable professionals. So began the rise of celebrity managers like Peter Lynch of Fidelity Magellan. And only a few years later, mutual funds, not individuals, were dominating daily stock market trading.

I will say some managers more than earned their fees in the 1980s and 90s. But for the most part, the most successful didn’t stay very long in one place. In fact, for many smaller funds, management became basically a revolving door. And the investors who gave up control by trusting their money to those funds had two choices—accept the change and hope for the best, or take their money and move on.

At this point, I’ll pause the story for some full disclosure. For the past seven years, I’ve served as an independent director for a mid-sized mutual fund company, which means I’ve had a fiduciary responsibility for unitholders to ensure best practices are followed by management. As such, I’ve had an up-close opportunity to witness another big picture trend in progress.

That’s what can be described as the systematic rigging of the game against smaller and even mid-sized mutual fund companies: With ever-escalating regulation—under both Republicans and Democrats—raising their costs, even as trading platforms have restricted their access to prospective customers.

The result has been a creeping demise of small to mid-sized mutual fund companies. And the chief beneficiaries have been the big firms, which have become ever-larger and more powerful, accumulating more and more assets.

Now the rise of still lightly regulated exchange trade funds or ETFs has shifted the giants’ push for total domination over US investors into overdrive. Vanguard, for example, has now gobbled up more than $7 trillion of investors’ capital with a simple message: Individual investors are simply incapable of devising and following their own investment plans, and paying fees to professional advisors for that purpose is a waste of money, as they rarely if ever provide a meaningful edge.

You don’t have to be a cynic to notice what’s been left off the avoid list: The computer-managed ETFs Vanguard and other giant firms offer in abundance—single securities representing baskets of stocks set up to follow various indexes, the largest being the S&P 500. Vanguard has no advisors to pay and trades are automatic. So its costs are minimal—and the bigger its ETFs grow, the more its profit margins expand.

The fees charged to investors for holding ETFs are certainly less than would be the case for a mutual fund. And they’re far less than for a professionally managed account. But there’s also no real portfolio management service or oversight of investments.

That means ETF owners are effectively as much on their own as they would be buying their own individual stocks—and with one huge additional disadvantage: No control over what they own, and in many cases no real knowledge either.

Investors will make money when the stock market is going higher and the proverbial rising tide is lifting all boats—as it was last year when the typical S&P 500 ETF was up about 28 percent. But did you know the S&P 500 actually lost almost a quarter of its value over the 10-year period from 2000 through 2009? And the high-flying technology stocks that have contributed most of the S&P 500 ETFs’ gains the last few years—well the Nasdaq 100 actually lost half its value that decade.

You know who did well investing in the ‘00s? — investors who kept control of their money and bought their own stocks. And you didn’t have to get exotic with your choices, or be on someone’s board of directors to be a winner.

For example, a $10,000 investment in the dividend reinvestment plan of super oil stock Chevron on December 31, 1999 was worth roughly $25,000 10 years later.

A $10,000 stake in the DRIP of utility NextEra Energy grew to more than $35,000.

And $10,000 in water utility Aqua America grew to over $28,000—and keep in mind this was at the same time funds set up to mirror the S&P 500 lost almost 25 percent of their value.

Why bring up the past now? One reason is the future could well wind up looking a lot like it—with inflation recently hitting a 40-year high and the Federal Reserve gearing up to contain it. And stocks, they’re trading at their highest prices relative to companies’ business value since, well, the great technology stock wreck of 2000-02.

My point though isn’t just to warn you about some dystopian future that might lie ahead—but that there are a lot of reasons why you need to be in control of your investments going forward.

The first step is to shut your ears to the fear-based marketing that’s telling you all the reasons you can’t or shouldn’t take control, and instead resolve to start making your own investment decisions—beginning immediately.

As I said earlier in this message, I’ve been in the business of helping investors make these decisions for more than 35 years. And I’ve talked to literally thousands of people over that time—more than a few from when I presented at major investment conferences, like the late Louis Rukeyser’s annual events, held at the Las Vegas’ MGM Grand arena in the early ‘00s.

Those were the salad days for celebrity fund managers and advisors. And I have more than a few stories I can share with you in the future. But if I learned anything from shaking hands and chatting with all of those people, it’s that all of us as investors have different objectives, goals and dreams. And we also have our own strengths and weaknesses, tolerances for pain and risk, and emotional tendencies.

There are many roads to success in investing. But having an understanding of what’s special to you and planning accordingly is absolutely critical to all of them. And clearly, just as no two investors are exactly alike, neither does one investment strategy fit everyone.

Ironically, that’s exactly what the Vanguards and Blackrocks of the world have been trying to sell investors on in recent years—with the goal of herding as many of us as they can into the giant ETFs that are basically pure profit for them. Pure profit at our expense!

I am a man on a mission—The first step has been to convince you of the need to take control of your money. If I’ve done my job, I now invite you to keep a lookout for my next post, in which I’ll show you how to educate yourself about your best options for investing.

Thanks for reading. Here’s to your wealth!