The Goldman Touch is Not the Midas touch

In my 20+ years experience as an investment advisor, I am surprised at how much blind trust and faith investors give to large investment banks. I get it, they are well known and “reputable.” But what makes them reputable? That is a question that needs to be pondered and at least attempted to answer.

Maybe they are reputable because they hire only “the best,” they require very high minimums to do business with them, or maybe they are riding the coattails from decades ago. But I just don’t see it. To the contrary, I see where they do a great disservice to investors.

I Am Not a Believer

Goldman is perhaps one of the most respected financial firms in the world. I don’t know why. I have several years of observation that leads to my incredulity. But this isn’t just about Goldman – it is about large, “reputable” financial institutions that often give awful advice without any measure of accountability. Goldman is a proxy for many big, “reputable” financial firms.

I wish I had kept the evidence, but I remember during the Global Financial Crisis when financial firms reduced their recommended allocations to stocks after they experienced significant loss. Don’t worry, they eventually increased their recommended stock allocations…well after the market had rebounded.

Evidence Today

No fear, these banks are back at it and here is the evidence. The WSJ reported in August that Goldman changed their recommended exposure for equities to underweight for the next three months, “citing downward pressure on valuations and negative earnings forecast revisions likely into year-end in the wake of the Federal Reserve’s rise in interest.” This recommendation came after the S&P 500 was down 23% for the year.

In a nutshell, we are told that after losing 23%, we should sell stocks and raise cash. What kind of firm that supports long-term investing would recommend investors go to cash? Ah, you say, but they don’t support long-term investing because this is only for the next three months. Got it! In other words, investors shouldn’t be long-term oriented, they should be investing quarter-by-quarter. Do you see the problem here?

You would think with stocks on sale that a reputable investment firm would advise long-term investors to hold or maybe even begin to overweight stocks. Most investors say they want to buy low and sell high, but some of the “reputable” firms tend to recommend otherwise.

Contrary to Published Evidence

Studies show that no one can trade in and out of stocks successfully. Dalbar, Inc. and Morningstar have shown that the buy and hold approach significantly outperforms those that move in and out of stocks. Financial advisors know this, but apparently the “reputable” firms do not. Advisors are rightfully telling their long-term investors to hang tight, pointing to the fact that historically long-term investors have been well rewarded for their patience.

It will be interesting to see when Goldman, and other “reputable” financial institutions, recommend investors buy more stocks. Will they be able to nail the bottom? Or how much will the market increase before they recommend investors buy? Only time will tell. But empirical evidence shows that trading in and out of stocks leads to lower returns. And that is a reputation no one should want.


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