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An additional quote on the subject from the WSJ and Barron's 2002, "The buy-and-hold mantra that was drilled into investors' psyches by the bull market of the '80s and '90s no longer leads to nirvana." And "the buy-and-hold philosophy also argues that stocks go up over time. According to data from Chicago-based Ibbotson Associates, from 1926 to 1999, 90% of five-year periods were positive for stocks. But those figures don't reveal long periods of pain in the stock market. After the 1929 crash, the Dow Jones Industrial Average took 25 years to regain its pre-crash levels. The Dow traded above 1000 in 1968, but failed to close above that level again until 1984." Why were those statistics not identified to investors. Why were those problems not adjusted in the portfolio for Smith in 2000 - 2002. The problems were clearly identified and, though they had happened many years prior, they can not be excluded from statistical patterns that would, almost assuredly, happen again. The commentary is extensive and it is not the intent to write a complete treatise from every analyst who has reviewed the subject. Suffice to say, the "buy and hold philosophy" is a marketing pitch that did not hold water in the past and could never be assumed to exist in the future. That Samoan Express and Johnson wished to use this as a statistical fact for the future was a violation of a basic fiduciary duty. Repeated from Samoan Expresses's plan "At times, investor's instincts lead them to invest when the market has been good and to pull their money out when the market has declined. While that investment method may feel right, it is a virtual guarantee of trouble............"The virtual guarantee of trouble was the lack of analysis by Samoan Express and Johnson leading to a completely violated retirement plan. Further, Samoan Express and Johnson were completely aware that Smith had to take money out of his portfolio in order to have living expenses. The odds of getting back to where he was before is effectively negated in total since there is less and less money each month of which the market (supposedly) increases.
From a plan I presented to a widow in 2001, "I will make this note however- and an issue that I always teach in all classes. The market is volatile- clearly evidenced by 2000 and 2001. But beyond that is the problem of 1973/74 where the market dropped over 45% in a little under 2 years. The plan I am submitting will cover most contingencies of returns but nothing can prepare anyone for a loss that large. Regardless of the investments I select- and they are for long term positions- it is absolutely mandatory that a continual review of the market- specifically economics- be conducted at all times to assure that you do not fall into the scenario of losses that large. That would almost assuredly negate any viable planning at almost any point in your life."
From a plan I presented in 2004 for a couple in their 40's. "Unfortunately, a lot of the theory may not work well in practice. The world does not provide consistent returns of 5%, 10% or whatever. The 2000- 2002 market clearly identifies what can go wrong. If the portfolio is decimated in the early years, any attempt to take out the projected constant return will lead to insufficient funds. Statistically, if you take out no more than about 4% annually during retirement you have about a 95% of having adequate funds (it's called a Monte Carlo analysis- a statistical run of numbers covering "all" market contingencies that are based on past performance). However, also unfortunately, the amount of money you would need for a 4% distribution well exceeds $10,000,000. Well, that is just not feasible. The offset to this is to adjust the portfolio to analyze economics to avoid major downturns. Easier said than done since few advisers bother to read the mandatory economics (Fed reports for example) and even fewer have the ability to analyze the facts therein. But there is your key to success. If you plan for an even, stabilized return over time, it just won't happen. It is true that you can end up very wealthy if the market responds favorably and at the right time. But just as frequently, the uneven returns can devastate your retirement. This is not intended to be an alarm per se. You have many years of earning and investing. If you do it diligently and the market responds as it has in the past, you should have more than adequate funds. But just sticking in money and hoping for the best probably won't cut it."
More significantly is this statement from page 97 of my 1995 course titled "Practical Investment Theory and Application" approved for Continuing Legal Education by the California State Bar, "The stock market has returned 10% annually on average the last 50 years. My primary concern however is NOT trying to be in the market when there is a major bear market- for example the early and mid 70's. The market lost about 45% in a relatively short time. And true that time did erase the drop, but it took about 13 years. If you had retired during that time, you would have less money than when you started. That is unacceptable." On page 99, "Author Frank Jones also notes that the tendency of the performance of all funds toward regression to the mean limits the value of too much reliance on long term performance as the only measure in selecting mutual funds." I concur wholeheartedly. Asset allocation identification of risk, and, most importantly, a review of current and forecasted regional, national and worldwide economics are the keys to intelligent investing." In short, all major brokerage firms have numerous economic and statistical analysts who are completely informed about these risks. It is the duty of the firm to advise and educate clients to the problems that will arise and what they intend to reduce a overly risky exposure. Buy and hold in a rapidly an continually declining economy increases risk- most times far beyond an elderly client to absorb in their lifetime.
Glenn Smith deposition:
Page 6: Smith has a high school education. No investment courses, no ability to use a financial calculator. No identification in the material to even remotely indicate sophistication whatsoever.
Page 27: Smith indicates he had 13 to 14 funds. That is at least twice as many as any advisors suggest. Once you get beyond about 6 funds, you might as well index and be done with it.
Page 46: Smith noted that he "trusted Mr. Johnson implicity................" Smith selected Johnson through a referral and had done no research on Johnson in order to validate competency or trust. Merely being licensed with a broker/dealer is no indication of competency.
Page 61: Smith notes that Johnson had indicated that Smith was ready to retire. As indicated above, there was no validity to Johnson 's statement.
Page 64: Johnson says that "you have to be patient, the market will come back." Perhaps- but the issue is when. Smith further notes that "I am needing some of this money now". The issue of stock losses, a limited time frame of retirement and the fact of taking continuing income streams from a declining asset value has been addressed above.
Page 65: The statements indicate that the actuarial lifetime of a 61 year old is up to age 88. That is incorrect. Per the Department of Health and Human Resources, 1996, a male age 61 had a life expectancy of 18.2 years.
Page 66: Johnson 's letter indicates that they will DCA over 12 months into no load funds. I have addressed DCA previously. However, it is obvious that Smith does not know what a no load fund is. He is merely parroting the letter by Johnson of September 9, 1997 wherein he states "over the next 12 months, we will Dollar Cost Average into your new Portfolio using the no-load funds." The funds were all back end loaded with significant redemption fees. Further, Samoan Express, Johnson and all supervisors know full well that these were not no load funds and could never be expressed as such. Only pure no load funds and/or those with 12b-1 fees of .25% or less could be called no load. Back end loaded Class B shares have large 12b-1 fees. That is what they are noted for. Not only could they not be called this, but all securities parties knew that the written statement attesting to same was categorically wrong. Additionally, because of these extensive 12b-1 fees, Samoan Express and Johnson knew that back end loaded funds invariably cost investors far more than Class A shares over time. And since a retirement period over 15 years was contemplated, the wrong class of funds were sold.
Page 74: Smith indicates he talked with Pippenger- Johnson 's supervisor on June 12, 2001 and Pippinger indicated Smith was "in the right place". I disagree as evidenced above.
Page 79/80: Smith indicates that Johnson would do DCA in a Federal income bond fund. But even under the (misguided) assumption that DCA works, the only commentary has always only been on equity positions. I have never heard of any value of utilizing DCA on bond funds since the volatility is so low. If there are no ups and downs, what is the point? The adviser has to have a clue to the movement of interest rates. If they are going down, then you take advantage of the possible gain in value and put all the funds in. If interest rates are going up, the use of most bond funds will produce a loss. DCA will not stop either one of these from happening. As to the movement of rates, the FED's open policy of indicating the possible direction of the economy has been transparent. No research papers I have ever seen even considered the value of DCA in bond funds.
Page 107: Smith said Johnson "explained my stocks were like heads of cattle and it would go back up and so forth. And he said we could take your money that you got left and put it in a retirement fund similar to Dupont might have and let you draw a couple hundred or whatever it might be per month." Once again, I may not dismiss the issue about the stocks going back up but once the losses are so severe, there is so little left that it might not make any difference. I am assuming Johnson meant Dupont and an annuity- but it is not perfectly clear.
Page 110: Smith notes "so while you have to focus on the longer, here I am 67 or so years old at that time or 65, ..........; anyway, I don't have a long time. I don't have another year sometimes is what I was trying to get across. I needed to start drawing that money in 1999 or early 2000............... I couldn't live on Social Security alone." The statements in deposition is exactly what Samoan Express and Johnson either knew or should have known were the critical points of this case. Smith did not have adequate funds for retirement nor, after the losses sustained, did he have enough time to have them grow again.
Page 112: ".......and he said your stocks and bonds are worth whatever and the market will come back. Even thought he price is down now, they'll come back up history tells us. That is what he was saying." Later on the page, Smith was questioned, "That's pretty much consistently what Mr. Johnson told you when you raised those concerns about he value of your account day to day, he just said you need to be patient and sit tight and things will work out; is that generally what he told you? Answer, "that's pretty much what it was. But I couldn't sit. I must go on the record and say that I couldn't sit and live on $1,282 a month and live on that money" Once again the point was always obvious- Smith had insufficient assets to begin with. But whatever existed had to be retained as much as possible. Samoan Express did not provide adequate or competent advisory services.
Page 114: Johnson 's attorney as if Johnson told Smith "this year hold tight on your expenses. Hold off on asking for monthly income and give the market time to recapture itself before we begin a stream of income?" Answer, "he says here hold off on asking for any more money from Samoan Express until the market can recapture itself before asking for a stream of income............." Where is the formal budget? Since a formal plan was done and paid for, minimum facts were needed to be established. And annual expenses is the key to a plan.
Page 130: Question- "But what concerns you about the funds was the fact that they had gone down, not so much that they were Samoan Express funds. If the Samoan Express funds had gone up, you wouldn't have had a concern of being with Samoan Express funds?" I have a question with the validity of the question to begin with. If people were that sophisticated to begin with, they would not have to use a planner. Less sophisticated might use a planner but would have immediately recognized the extensive expense ratios of Samoan Express and opted out. Totally unsophisticated people get absorbed by the marketing and perception of trust. Smith was clueless to the elements of planning and put his entire retirement in the hands of Samoan Express. He was unaware of risk and reward. Like most people, he hoped for a gain. When there was a loss, it is generally only then they might do additional homework. That said, most implicitly trust their adviser.
