A Tale Two Traders

In the last couple of days I have had conversations with a couple of friends in the business with two totally different approaches to investing. They are so diametrically opposite that I think it might be constructive share how they do things.

One friend, I'll call him Ernie, is a broker at one of the big wire house firms. He uses a lot of ETFs to manage his practice. The last few clients he has brought in have all had similar portfolios, extremely overweight growth stocks. Ernie has been trying to explain the virtue of having a sense of game over (that is being conservative once you accumulate enough money). Ernie is restructuring these portfolios to that end. Based on what he was describing he is being too conservative. One of the clients has $1.1 million and needs $54,000 per year. 5% is a good draw down percentage. If, and this may be a big if, inflation stays at the same rate for the next ten years as the last ten years the income need in 2014 will be about $81,000. The account will need to be at least $1.62 million to produce that income safely. The account will have to average about 10% per year to pay the income need and cover the inflation of that income need.

Realistically, a lot of the average return from the market over the next ten years will come from two or three huge years. Ernie's too conservative portfolio will not capture enough of the effect to give his chance a realistic chance to get where he needs to be.

The other friend, I'll call him Bert, used to work with me in my days as a trader. He was recently separated from his job after a restructuring. He took the package and ran, good for him. Bert takes risk I can't begin to understand. He builds huge positions in very small four letter stocks and usually does well. He does the research, has a clear exit strategy for each one and is emotionally prepared to deal with the consequences. I usually hear about the winners, but not the losers (that is human nature, and I am not critical) so I don't know how much he beats the market by, but I do know he takes a lot more risk than the market. Bert is relying on a lot of things to go right. He may never face the consequence of the risk he takes, but he takes it nonetheless.

Every investment style has drawbacks. I don't know if Ernie and Bert see the drawbacks to there methods or not. Hopefully this will motivate you to get in touch, if you haven't already done so, with the drawbacks of your strategy. This is not a call to tell anyone to change they way they do things, but I do believe a little introspection can give anyone a shot at better results.