The other day I was chatting with another firefighter and when we were done with department business he asked me about the stock market. He told me he is down by some amount and like most folks he is not sure what to do and he is a tad dubious about what "his guy" is telling him.
On a related note the ROI column in the WSJ Monday talked about five actively managed funds to buy for this sort of market environment. The money quote from this article was;
It's at times like this that some actively managed funds start to gain real appeal.
Or are you really so comfortable with this market's overall valuation that you are happy to buy an index fund and go along for the ride? If so, by all means take those routes. I prefer to sleep at night.
The flaw here, both with "his guy" and in the WSJ article is what appears to be a lack of proactive thought and execution as well as just mentally wrapping your arms around the fact that cycles end with declines and those declines make people uncomfortable.
Unfortunately there is a dearth of MSM coverage from this angle and maybe even a lack of proactive moves made by people in the industry? I don't know about that last one, it is just an anecdotal observation based on interviews I read and interviews I see on TV.
It would seem to me that one of the worst things any investor can do is wake up one morning and say "uh oh the market is down 20% what should I do?"
Not everyone should utilize an exit strategy or a get defensive trigger point, that falls under the investor know thyself category but anyone prone to emotion during declines needs to do some planning ahead of time. Planning either means deciding what action to take or telling yourself that your will hold on no matter what and that if you have, say, $100,000 understanding ahead of time that might shrink to $70,000 in a normal bear.
Mental preparation can go a long way to mollify the distress. This a point often repeated here but it is true and I find it very unfortunate that anyone working in the business doesn't do more ahead of time to to avoid emotional problems that arise.
The picture is from Watson Lake here in Prescott.
9 comments:
Keep on explaining how it is "normal" for $100,000 to shrink to $70,000 in a bear market, because a lot of peoples emotions just do not handle this well. I think your constant rationale approach is really needed by most individuals.
Unfortuantely Roger you are making the assumption that the majority of the finance world cares about their clients and actually knows what they are doing. I am in the business and have seen the idea of gathering assets and then doing what everyone else is doing to "save my own skin" really take hold. It makes me sad and I find it very difficult to talk to new clients about the difference between a good manager and a poor one. If everyone had the same attitude as you Roger, finance would have a much better rep.
Roger
At the risk of coming across as completely insensitive, I think anonymous 6:47 has it exactly right. People do it to themselves.
A significant portion of client-service financial professionals are smart enough to realize that their interests are not perfectly aligned with their clients. Due to the structure of the industry, there are inherent conflicts of interests there. This isn't a value statement, just a seemingly obvious observation. Of course some will exercise integrity, but clearly some will not (we can speculate on ratio). And don't lose sight of people's capacity for self-delusion when they have a financial interest at stake. Both clients and advisers are subject to this effect.
My anecdotal experience is that vast majority of people who seek professional advice don't really want to engage the heavy lifting intellectual work of understanding what their adviser is recommending, and the full range of implications including risks of those decisions. After all, if they wanted to do all that work they could probably just do it themselves.
My guess is that any adviser that makes a point of insisting a portfolio would be guaranteed to lose 20 or 30% at times would have few clients, especially given that the guy across the street is bragging about how his clients are all making lots of $$. So even the good ones will only mention the possibility in passing, but then quickly get client back to thinking about what can go right. That's just selling. It's only the really exceptional ones that will go out of way to hammer potential downsides so client is really emotionally prepared.
By the way, based on this blog my guess is that you fall into this last category. I'm sure your clients benefit from this, but realistically you're quite atypical.
Michael
I typically send my active fund manager the head of a dead rabbit in a nicely wrapped box with a note as to the "lowest" point I am willing to have my investments go.
Seems to have always worked so far.
So what if those "whiners" lost $30,000 in a normal bear market. Just point out to them that they only need to make a "normal" 10 percent annual return for the next 4 years to get back even.
OG
Roger: Can you please share your thoughts on why two different ETFs of the same country behave differently. For example, in the case of Chile, some times ECH goes up but CH goes down. Also, the ETFs performance over time differs widely. Is it mainly because of the differences in the holdings in the ETFs and the structure of the product (one is an ETF and the other is a CEF)? Are there other reaons? If so, how should one go about choosing between two competing ETFs or CEFs for the same country or region.
I have read some articles comparing VWO and EEM and suggesting VWO over EEM because of lower fee. However, the holdings of VWO and EEM are not identical and also their perofmance over time are not identical. I personally split my investments between VWO and EEM as I am unable to identify which one is superior.
Thanks for your time.
stranger
I, too, have to agree with the thread above. If I'm not proactive with my advisor and ask for advice, I won't get much until it's too late. Good execution, poor on strategy (read: hard thinking.) Like many folks, I suspect I'd be better off with a self-directed account at a discount brokerage.
Boy, this bounce feels gooood! LOL!
interesting thread evolution.
re ECH versus CH. they are different types of products. ECH is an ETF and CH is a CEF. fear and greed can take the market price in a diffferent direction from the NAV. Not a big issue with an ETF.
My two cents on the advisor comments comes from how we are structured. all i do is portfolio stuff and writing--all the other things that go into running a business are done by my colleagues.
in all likelihood the typical small RIA is wearing a lot of hats. It takes me 75 hours a week to wear one hat.
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