Financial disclaimers actually contain the most important lessons in investing.
Morningstar is a well-known investment research and financial services firm famous for rating mutual funds (a.k.a. Unit trusts) across the globe. They publish an excellent report called Mind the Gap, which shows the difference between investment returns and the actual returns that investors experience.
Let’s take Morningstar’s The Long View podcast and its accompanying disclaimer.
(Disclaimer: This recording is for informational purposes only and should not be considered investment advice. Opinions expressed are as of the date of recording and are subject to change without notice. The views and opinions of guests on this program are not necessarily those of Morningstar, Inc. and its affiliates, which together be referred to as Morningstar. Morningstar is not affiliated with guests or their business affiliates, unless otherwise stated. Morningstar does not guarantee the accuracy, or the completeness of the data presented herein. This recording is for informational purposes only and the information, data, analysis or opinion it includes, or their use should not be considered investment or tax advice and therefore, is not an offer to buy or sell a security. Morningstar shall not be responsible for any trading decisions, damages or other losses resulting from or related to the information, data, analysis, or opinions, or their use. Past performance is not a guarantee of future results. All investments are subject to investment risk, including possible loss of principal. Individuals should seriously consider if an investment is suitable for them by referencing their own financial position, investment objectives and risk profile before making any investment decision. Please consult a tax and/or a financial professional for advice specific to your individual circumstances.)
Four lessons
Four statements stand out in this disclaimer, and they contain a wealth of financial wisdom. Let’s go through them one by one.
1. Past performance is not a guarantee of future results
This is the most well known disclaimer, and yet people give it short shrift. People constantly use track records as a way to justify investment decisions, even though past performance is not a guarantee of future results. In fact, stock returns display serial autocorrelation – when current stock returns are higher, future returns are lower. When current stock returns are low, future stock returns are higher.
2. All investments are subject to investment risk, including possible loss of principal.
Investing carries risk. Risk is an integral part of return. Risk is the price of return. You cannot have return without risk. Without risk, you get low returns. This must always be true. Yet people will constantly sell you products that purport to offer you high returns without the risk. Examples are structured notes, covered call products, buffered/capital-guaranteed equities. Unfortunately, the truth is that these are very profitable products – but only for the people who are selling them to you.
3. Individuals should seriously consider if an investment is suitable for them by referencing their own financial position, investment objectives and risk profile before making any investment decision.
Any investment decision has to consider your own personal financial circumstances. Your a) willingness, b) ability, and c) need to take risk are all inputs that go into making your investment decisions.
And yes, you should definitely take this seriously. Money is a big deal.
4. Please consult a tax and/or a financial professional for advice specific to your individual circumstances.
This is a reminder that we shouldn’t base our own financial decisions on what influencers or loud voices on social media say. They aren’t allowed to give specific financial advice based on your situation, and therefore you shouldn’t blindly rely on generic financial advice given by people with questionable credentials and knowledge and whose interests may not be aligned with yours. Yes, this includes me!
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