Be Skeptical Of These Popular Investment Phrases

November 1, 2016 - Max Osbon (3 mins to read)

This week we are happy to offer you a healthy dose of skepticism. We see product pitches, commercials, term sheets that friends, prospects and clients send to us, and all kinds of twists on the same investment pitches. Some of these advertisements have some value; most are just storytelling. Here are some buzz words to watch out for.


Upside Participation with Downside Protection

How do these funds work? Match equity exposure like the SPY S&P 500 ETF (upside potential) with put options 10% out of the money (downside protection). The only problem…the protection’s not free. Over the long term, you’re going to sacrifice 1%, 2%, or even 3% of your upside return per year for that put option protection. And there’s no guarantee that the put options are going to behave the way you think when markets sour. Tack on a meaty management fee and there’s no way this fits with long term investment goals.

Low Volatility Fund

Also know as “managed volatility.”  Similar to the “upside” example above, this type of fund weeds out some stocks that look like they may be more volatile, or uses options to manage portfolio swings. Unfortunately, it’s expensive and often falls apart when the markets get really rough. This year, for example, low volatility funds have been high volatility. Don’t buy the propaganda, and don’t pay for something you’re not getting.

Tactical Allocations

My brow furrows when I hear the words, “tactical allocation.” The best of the best tactical traders — market timers — work at hedge funds for multi-million dollar bonuses. And it’s not at all clear that even they can consistently outperform. Looking downstream, we haven’t seen any evidence that ETF managers, mutual fund managers or stock picking investment advisors can time the market consistently and reliably. The cost of failure is high; it means the manager sells low and buys high. Not good.


Not all annuities are inherently bad. However, I can’t remember reading any term sheets and thinking to myself, “This is exactly what I’ve been looking for.” Most annuities come with high commission fees (8% is standard), complex structures, extremely high exit fees (50% is standard), and suspicious promises to outperform 20 years down the road. Guaranteed payments seem comforting, but too often the deal terms just don’t add up.

Portfolio Insurance – A history lesson

Portfolio Insurance was very popular in the 80s. Tens of billions of portfolio insurance was sold to investors until the crash of 1987 hit, aka Black Monday. Portfolio insurance disappeared as it became clear that the strategy falls apart when markets crash (which is when it’s needed most). You can read all about this in Peter Bernstein’s Against the Gods. One of my all time favorite books on risk.

If it sounds too good to be true…
A broker I know in NY state was telling me about a new risk reduction offering from a well known firm. I asked him how it worked. His response: “Oh I don’t really know. I’m just supposed to sell it.” If you have any other phrases that make you suspicious, send them our way. We’re adding to our collection all the time.

Max Osbon-




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