by Archie M. Richards, Jr., CFP^®
February 20, 2006

Don't let investment professionals snow you. They're not like engineers or surgeons, who deal with things they can touch and whose predictions are more likely to be right than wrong. Investment professionals deal with intangibles, and their predictions are more likely to be wrong than right. Oh, they can talk with assurance about what has happened. But as to what's around the bend, they're as bamboozled as everyone else.

Stock analysts are often wrong by wide margins. Mary Meeker, of Morgan Stanley, for example, kept recommending Priceline.com all the way from $40 down to $1.

When growth stocks finally start outperform value stocks, they'll be plenty of professionals who say "See, I told you this would happen." Some will boast that they advised selling value stocks and buying growth stocks at just the right time. But you're likely to find they made the same prediction prematurely for several years. If you keep on predicting the end of a stock trend, eventually you'll be right.

Others will proclaim that they made the prediction right on the mark. But on investigation, you may find that over the last ten years they'd made five different market predictions, with this one the first that proved correct.

Newsletters will say, "See, in such-and-such issue of our newsletter, we told you to sell value stocks and buy growth stocks." And it's true; they might have said this on Page 1. But on Page 3 of the same issue, they also recommended several value stocks. On one page they point one way, and on another page they point another. Newsletter publishers, you see, don't have to be right; they just have to sell their newsletters. They hedge, so that no matter what happens they can always say they were right.

And non-financial-planning stockbrokers? Most of those guys will say anything to get a sale.

On the cover of its August 13, 1979 issue, headlined "The Death of Equities," BusinessWeek showed paper airplanes fashioned from stock certificates crashing to the ground. The Dow was then 875.

Some crash. The Dow is now 13 times higher.

In 1973, economist Paul Samuelson, a Nobel Prize winner, suggested that as early as 1989, the Soviet Union economy would exceed America's. 1989 was about the time the Soviet Union crashed.

In 1983, thirty-five top Sovietologists attended a convention of the Center for International Studies. One of them summarized, "All of us agreed that there is no likelihood whatsoever that the Soviet Union will become a political democracy or that it will collapse in the foreseeable future." Just six years later, it did both.

In the 1980s, many "experts" predicted that the Japanese economy would surpass America's by 2000. The United States, they said, should adopt more Japanese-style government planning.

Some planning! In 1989, the Japanese stock market Index topped out at 38,000. Now, 17 years later, it's only 15,700.

Don't trust market professionals. Well, except for this author, of course.

Randy writes, "I want to follow your recommendations of 30 percent U.S. stocks, 30 percent foreign stocks, 20 percent real estate investment trusts, and 20 percent long bonds. Should I do as many experts suggest and put the high-yielding REITs and bonds into my IRA and the stocks outside? This would save income taxes.

No, Randy, keep a full array of allocations inside and outside your IRA.

With high-income investments inside the IRA and low-income investments outside, you can't rebalance properly without withdrawing from the IRA. Not just the income is taxed; the entire withdrawal is taxed, at high ordinary-income rates.

But if you have some of your securities outside the IRA, invested in high-income assets as well as low, the income is taxable all along - but just the income. Those who promote putting the high-income assets inside the IRA and the low-income assets outside undervalue rebalancing. This is a mistake. Rebalancing is essential; it's an automatic system for buying low and selling high without having to exercise judgment.

Make complete allocations both inside and outside your IRA. Yes, your taxes will be a little higher. But good investment policy trumps tax saving.