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Why Quarterly Investment Statements Make No Sense


Now that it's a new year, you'll soon receive your fourth-quarter investment reports from your investment company. You'll probably also get some sort of outlook statement for 2011 and a review of the significant events of the last three months. What exactly do you do with all that information? How about this: Ignore it -- it's a complete waste of your time. Here's why.

Now that it’s a new year, you’ll soon receive your fourth-quarter 2010 investment reports. If you have a financial advisor, he or she might send you an additional quarterly report detailing your performance for the last three months down to the penny -- every stock, mutual fund, and account the advisor manages. Along with your quarterly reports, you’ll probably get some sort of outlook statement for 2011 and a review of the significant events of the last three months.

The reports will say something like this:

“The last quarter of 2010 saw a surge in U.S. equity markets, driven by increased risk appetite by investors as they shrugged off stagnant unemployment reports and rising interest rates.”

“The bond market began to fall as investors feared rising interest rates, making short-term debt relatively more attractive at current valuations.”

“Our outlook for 2011 remains cautiously optimistic. After a 20-month runup, we think equities are probably overvalued and remain bearish in the near-term but cautiously optimistic in the intermediate-term. Therefore, we recommend a more defensive stance and more exposure to large blue-chip stocks with stable growth, such as those in the consumer staples and healthcare industries.”

While all of that sounds impressive, what exactly do you do with all that information?

How about this: Ignore it -- it’s a complete waste of your time. Here’s why.

First, by the time you read a review of economic events that occurred in the past quarter, it's too late to adjust your portfolio. Yes, unemployment was 9%. Yes, interest rates rose. Yes, manufacturing was flat. The problem is that none of this information helps you predict what will happen this quarter. Even if it could, you and your financial advisor are not the only ones who know about it. So by the time you react to adjust your portfolio to capitalize on the information, everyone else has already adjusted theirs and, once again, it's too late.

Second, what exactly do incredibly vague terms like “cautiously optimistic” mean? I have no idea, neither do you, and I can assure your advisor doesn’t either. But it creates the illusion of sophistication. Speaking of which, what does “near term” mean? Is it the next hour of trading? The next day? The next month? Investing is a long-term process, so why all the talk about last quarter and the near term? But financial advisors purposefully use nebulous terms like this to make themselves look smarter than they really are. Think about it —if you don’t define exactly what these terms mean, then no matter what happens to the market or the economy, the advisor will tell you he’s right. If the market goes down, he’s right because he’s cautious. If the market goes up, he’s right because he’s optimistic.

Third, how can anyone understand something as complex as the economy and the stock market, and then predict where they’re headed? The Fed can’t do it. Mutual-fund managers can’t do it. So how can you expect your financial advisor to do it?

Finally, while last quarter’s performance was probably pretty good, there’s no predictive value for this quarter’s performance, or even this year’s performance. What’s more important is figuring out your performance in relationship to meeting your future goals.

So when you receive your quarterly statements skip the economic outlook and summary. Instead focus on more meaningful things, such as: Do you have the portfolio that’s right for you? I’ll tackle that question soon.

This week's financial prescription: Toss your short-term investment reports. They're a waste of your time.

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Victor J. Dzau, MD, gives expert advice
Victor J. Dzau, MD, gives expert advice