The views presented here do not necessarily represent those of Advisor Perspectives.
When it comes to investing, it’s the Wild West out there. Our clients are hearing things from less scrupulous members of the financial services industry that appear true on the surface but are really aimed at separating people from their money. In addition to appearing true on the surface, they tug at our clients’ emotions to get them to act. I suspect you’ve heard some of these ten statements. Here’s how to explain why they are dead wrong.
1. If you had invested in this strategy, you would have doubled the market return.
This statement offers a “Back to the Future” appeal, where the expert claims his clients reaped the benefits of this brilliant strategy. This is nothing more than predicting the past. Did this guru really recommend that strategy before it started working? Did he also recommend some other strategies that failed miserably?
2. Last year, 10 of the funds in our family of mutual funds and ETFs had five- and four-star ratings from Morningstar.
Those are the top two historic performance ratings Morningstar awards to funds, and generally firms don’t lie when they state something like this. But how many funds does this fund family have? Does it also have one- and two-star rated funds as well? What is the average fund rating?
Another related so-called truth is an ad from a firm reading something like “for over 20 years, our newsletter has delivered a proven track record of market-beating returns of 969% vs. 192% for the S&P 500.” This firm in question has had many newsletters. They make noise advertising the winners and quietly shut down the losers. A more important — and far more durable — truth is that past performance is not indicative of future performance. Many firms nevertheless report past performance, relying on investors' widespread (though mistaken) belief that it meaningfully increases their odds of beating the market in the future.
3. It’s not about decreasing costs, it’s about increasing one’s returns.
Even I find it hard to argue with this one. Of course I’d rather have a 20% return with a 2% expense ratio than a 5% return with a 0.03% expense ratio. But the data shows that costs are the best predictor of performance. The higher the costs, the lower the return compared to similar portfolios or funds.
4. Smart money is invested in tech as artificial intelligence (AI) continues to change the world.
Tech has certainly been the best-performing sector. The Vanguard Information Technology ETF (VGT) has turned in an average annual return of 21.44% over the last decade ending March 31, 2026. Sure, some investors may have been smart to recognize how transformative AI would become and even bought Nvidia a decade ago.
Today, however, Morningstar shows the technology and communications services (like Alphabet and Meta) sectors comprise nearly 42% of the market. In other words, it’s already been priced in, and overweighting the dominant part of the market doesn’t seem so smart to me. It wasn’t long ago we were told the smart money was in small-cap value funds. That didn’t turn out to be too smart, either.
5. Asset allocation determines more than 90% of performance variation.
This statement came from a famous 1986 study by Brinson, Hood, and Beebowe entitled Determinants of Portfolio Performance. It’s true that asset allocation does explain over 90% of a fund’s variation over time. But it explains only about 40% of the difference between one fund (or portfolio) vs. another. That’s because stock market returns over a T-Bill are driven by a handful of companies, so a stock-heavy portfolio that is not fully diversified may easily miss the winners. It’s also because funds have very different expense ratios. Thus, two portfolios of the same asset allocation can have very different returns.
6. Putting savings in an IRA or 401(k) ultimately results in paying more taxes.
A true statement often used by certain financial planners (aka predators) to get clients to cash out of retirement savings and hand over money to them. Yet the goal isn’t to pay less taxes. It’s to increase one’s after-tax dollars, and tax-deferral is a great way to do it.
Think tax rates will increase? Logically speaking, we can’t increase the national debt forever. Unfortunately, I don’t think logic has much to do with politics. But if you think tax rates will increase, there’s always the Roth IRA and 401(k). In reality, I like both traditional and Roth IRAs as a way to hedge future tax rates, which are unknown.
7. You insure your home, so you should insure your stock portfolio.
This fuzzy logic is often used to sell annuities and completely ignores the fact that you are not insuring your house for a decrease in value. If you could, it would be prohibitively expensive. There are far better ways to mitigate the risk of your portfolio than buying annuities.
If you want equities without the risk of loss, build your own annuity. For example, if you want to invest $100,000 for 20 years without the risk of loss, put $61,800 in stock index funds and the remaining $38,200 in a zero-coupon Treasury bond yielding 4.94%. The bond will mature at just over $100,000.
8. You should care enough about your family to buy permanent life insurance, because term insurance is likely to expire without a claim.
These guys are better at using guilt than my mother was. Again, this fuzzy logic is thickly laid on to get you to buy a whole life or universal life policy. The truth is that you should buy insurance for what you cannot afford to lose. If you have the discipline to buy temporary term insurance and invest the rest, you have a more direct, lower-cost method of investing.
Insurance companies have balance sheets typically invested in 80%–90% fixed income. So the policy holder should expect to get that fixed income-like return minus the profit and expenses of the insurance company, less commissions paid to the agent.
9. Index investing is conservative and guaranteed to underperform the market.
Unfortunately, this is less true today since some so-called index funds can be very narrow or even offer highly risky tripled levered strategies. Yes, broad-based index investing is guaranteed to underperform the market. But more importantly, it’s also virtually guaranteed to beat most investors. Furthermore, it’s not necessarily conservative, in that it accepts nearly any level of risk since the asset allocation can be aggressive or conservative or anywhere in between.
10. To reach your financial goals, you must be proactive in your investing.
Being truly proactive in anything is a good thing. For example, being proactive in saving by paying yourself first is critical to reaching financial freedom. All too often, however, people misuse the term proactive investing to slam the “buy and hold” strategy by pretending they can time the market or pick the winners, and sell the losers.
I tell people that if they’re going to use this type of “proactive” investing, they would be better off hopping a plane to Las Vegas. It’s more fun, and the odds may even be better. No one knows what markets will do next week or next year, or which stocks or sectors will outperform. Research shows the more proactively you change things (trade), the lower the returns.
I advise clients that people are out to separate them from their money, sometimes using the fuzzy logic above. Common sense is the best defense. Anyone who actually knew how to beat the market wouldn’t be telling everyone else how to do it — and would be at least a member of the billionaire’s club. They certainly wouldn’t be selling newsletters for $199 a year.
Good financial products and strategies sell themselves and don’t pay commissions. I tell clients to question everything and put themselves in the shoes of the person pitching any product or strategy, asking themselves how they make money and if it will benefit you.
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Allan Roth is the founder of Wealth Logic, LLC, a Colorado-based fee-only registered investment advisory firm. He has been working in the investment world of corporate finance for over 25 years. Allan has served as corporate finance officer of two multibillion-dollar companies and has consulted with many others while at McKinsey & Company.
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The views presented here do not necessarily represent those of Advisor Perspectives.
