Safeguarding Your Securities Investments

Al Jacobs

About a week and a half ago a close friend phoned me concerning his portfolio of corporate securities. He placed the call several days before the 665.75 point drop in the Dow Jones Industrial Average on Feb. 2 – the sixth-largest points decline ever, and the kickoff of the recent market selloff (Note: At the time of this writing the second one-thousand-plus-point loss in that index just occurred). He asked me, in light of the then repetitive increases in the various stock indices, if I thought he’d be wise unload before something bad happened.

Just so you’ll know, I never predict whether the market will rise or fall. It’s not a matter of feigned modesty; rather, it’s because I harbor not an inkling of what will happen tomorrow … nor does any financial planner, market analyst or self-proclaimed expert have a clue. Probably the shrewdest reply ever made to the question of what the stock market will do came from J.P. Morgan who stated: “It will fluctuate.”

For those of you inclined to share your opinion on this matter with others, in an attempt to be helpful, be aware you’ll be blamed for whatever goes wrong. In any event, I passed the following comments on to my friend: I began by telling him I had no well-informed opinions. I then added that I personally abandoned the market on Dec. 2, 1995 when average price-earnings ratios topped 20 and dividend yields fell below two percent.

I added that we all know the market rises and falls as it chooses and advised him to do whatever makes him feel comfortable. As you see, I passed on a backhanded suggestion he get out, but not directly. The choice would be his and whatever the result, he could take the credit or blame.

In case you want to know what happened, he promptly disposed of all those securities he felt discomfort with. In a call I received from him yesterday, he informed me he lost little or nothing from the precipitous decline. I congratulated him on his good fortune and made the inference his feelings of discomfort must have been intuitive. Actually, because of his timing, my friend merely had a stroke of good luck.

I wonder, however, how many others whose fortunes are in the hands of self-anointed fiduciaries took a bath as their portfolios plummeted. Of even greater concern is where the market is now headed. The true misfortune is most clients will receive the same instructions they did a decade ago as their securities then headed south en masse. They were told the market will return – as it always does – and to be patient.

And while their net worth languished in the cellar for several years, both their advisors and the funds into which their assets had been consigned continued to skim servicing fees. Unfortunately for the mass of passive investors who constitute the bulk of today’s investment world, it’s the only option they’re offered.

This now gets us to the title of this article: Safeguarding your Securities Investments. It’s finally clear to the most naïve among us that holding a portfolio of stocks, bonds, or mutual funds is no guarantee of perpetual prosperity. But most importantly, you cannot rely upon someone other than yourself to represent your best interests. This is why you must take charge; investment decisions cannot be left to your broker or your financial advisor. As a start, become familiar with the investment world. Subscribing to the Wall Street Journal and Barron’s Weekly is a good start. Participate in and conduct your own research in every decision involving your holdings. Never authorize a brokerage establishment or individual stockbroker to maintain a discretionary account. Avoid involvement with anyone soliciting your business through telephone or mail. Steer clear of the manipulated markets: annuities, foreign-currency trading, options, precious metals, penny stocks, and the like. Finally, consider doing your business with a discount brokerage such as Charles Schwab or over the Internet.

Before I go further I must express my opinion of the mutual or exchange traded funds. For the potential investor with both limited expertise and assets, this type of investment vehicle seems to meet two important criteria: astute selection of securities and advantageous portfolio diversification. Though in theory the fund meets the intended needs, theory and reality do not always coincide. Before describing my fundamental concerns, let me acknowledge that many mutual funds operate legitimately with competent managers, and that large numbers of investors profited over the years. Recognize, however, that favorable results did not necessarily reflect the skill of the fund managers, but rather the consequence of a period during which the major indices posted their greatest sustained rises in history. These funds merely rise and fall with the general fortunes of the market.

My discomfiture is with the evolution of an industry where the placing of investors’ money seems, at best, a secondary consideration. Let me run the risk of asking rhetorical questions. Who are the thousands of officers and directors of the funds? How do the investors’ interests advance when the average fund manager’s annual compensation is in seven or eight figures? Who benefits from the trend in fund mergers, and in what fashion? Is the investor really well served by a fund which merely places its monies in proportion to a specifically designed index or another that simply acquires shares of other funds? And above all, who in God’s name is watching the store?

I’ll now offer a testimonial as to how I believe securities ought to be handled. This became my problem when I assumed responsibility for a testamentary trust exclusively devoted to corporate securities. With some prior experience – not all of it good – together with a dose of selective reading and, most importantly, excellent continuing advice from a knowledgeable investor, the best approach seemed full investment in common stocks of well-established firms on the New York Stock Exchange. I selected companies in healthy industries with a history of stable or increasing earnings, a generous portion regularly passed on as dividends. I preferred only firms with reasonably low price-earnings (P-E) ratios, and reviewed the portfolio every six months so to dispose of those no longer meeting the criteria. For the 21¾ years I oversaw this trust, it grew to nearly ten times its original value, with the requirement all dividend and interest income had to be disbursed annually to the trust’s income beneficiaries. You should note I never paid a fee to a financial planner or a fund; I consider that to be the major reason the asset value appreciated as handsomely as it did.

I’ll summarize my conclusions: Though selection of individual securities is now considered passé by the investment industry, I’m convinced it makes more sense than permitting a paid financial advisor – with no proprietary interest – to dump you into a group of funds, chosen mostly at random. The person who must ultimately approve the assets you select is the face smiling back at you from your bathroom mirror.

A final thought is in order. Many of you may believe your governmental representatives are the key to the nation’s prosperity and that they will regulate the investment markets to protect you. Don’t presume our nation’s leaders know what must be done to resolve economic problems. In most cases, their specialty is getting elected or appointed to political office. Few possess any understanding of financial matters so, by necessity, must rely upon the advice of others. Invariably the decisions are recommended by bankers – those who store other peoples’ money, by accountants – those who count other peoples’ money; and by economists – those who philosophize about other peoples’ money. Rarely are programs developed and administered by persons who actually deal regularly with their own assets and possess some feel for what works and what does not. As a result, you’d better ignore the grandiose proclamations offered as you hang on tightly to your purse or billfold.

Al Jacobs, a professional investor for nearly a half-century, issues weekly financial articles in which he shares his financial knowledge and experience. You may view them on


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