When choosing a portfolio of equities and fixed income, you and your investor coach are looking at lifelong expectations. “Lifelong” means for your entire life. For some that is 10 years, for others that means 40 years or more.
When you purchase a basket of stocks and bonds, you have a 50/50 chance of immediate gratification – i.e. your statement comes in the mail and Hooray! You’ve already made money. Now how do you feel about your investor coach? Yes, I knew it – you think they’re genius, right?
Well, now let’s look at the other possibility – your account is down in value – notice I didn’t say “lost” because you didn’t sell anything. Since you didn’t lose anything, your statement is reflecting the stock market and is simply down in value. Now, how do you feel about your Investor Coach? Not too good, right? Questioning whether you made the right decision.
So, let’s take a look at why that may be. First of all, you hire a competent financial professional, whom you believe in and trust, after all, you’ve given that person your money, so you must trust them. However, based on past experience, maybe things have not fared well in previous relationships, or you are unfamiliar with how the market works, or you are simply listening to the media. Secondly, where do you think the returns in the stock market come from? Do you think since your account is down in value that your coach has made a bad decision about where to invest your money? So, now what happens if the stock market continues to drop in value and you have 1-2-3 years of a down cycle in the market? Are you ready to get out? Or, worse yet, have you already sold out? Now, how do you feel about your coach? Well, I think I already know the answer.
I’m going to give (3) hints to help you understand why it’s important to work with an investor coach as opposed to a financial planner and to stay with lifelong plans that were setup originally by you and your coach:
1. Dalbar, an independent research group, measures intangible factors in investor behavior. They conduct studies to determine whether investors’ investment decisions impact their investment performance, including decisions to buy, sell and switch into and out of mutual funds over short-term and long-term time frames. Unfortunately, decisions are impacting performance in a very big way. The group studies behavior in 20-year increments and compares performance to a benchmark, the S&P 500. Studies are conducted with investors that have $100,000+ to invest. The results of the 20-year study ending 12/31/10:
– S&P 500 = 9.14% average
– Average equity mutual fund investor = 3.27%
The reason: average holding periods for the investor = 3.2 years. 1 In all fairness to you as an investor, this may not always be your decision. Many financial advisors will sell their clients’ holdings based on their own judgment or at the clients’ request and move to another strategy, move to cash, etc. Also, within retail mutual funds, the money managers’ goal is to “beat” the market, therefore they are actively buying/selling within the fund. It is not only important for us as investor coaches to help manage investor behavior and expectations, it is also our job to remind clients why their investment strategies were chosen and reminding them of their goals, providing income, (now or in the future) and their plan is a lifelong plan.
2. Annual stock market returns since 1926: Have the patience to let the stock market “double double” for you. Since 1926, approximately 2/3 of the time, the stock market has had up years vs down. The worst year was 1931, preceded by 2 “down” years and followed by a “down” year. The year 2008 was the 2nd worst. So far, 2008 is surrounded by “up” years. The years 2009 and 2010 have given us hope.
Also, the “up” years go up about twice as much as the “down” years go down. So, as an investor you would have made more money on the “up” years than you would have lost in the “down” years. 2 This point is important to remember, because you wouldn’t be taking advantage of the “up” years had you cashed out.
Your retirement horizon gives you time to ride out the downturns. Have the patience to let the stock market “double-double” for you, no matter what your age. A diversified portfolio of all 19 academically defined asset classes and 44 countries has proven to provide payment against the ravages of extreme downturns and inflation, while providing a return to last you your retirement years.
3. Stock market returns do not come from money managers, financial advisors or your financial coach, they come from the stock market.
With that said, we are fiduciaries, meaning we act in the best interest and for the life long process of investing for our clients. It is important to remember the diversification and asset allocation that you have with Pathfinder and because of that, it is not necessary to actively buy and sell in your portfolios. Therefore, when we do encourage you to stay the course, it’s for your own good, not ours. The difference between coaches and financial advisors is a coach will tell you to do the right thing based on facts, knowledge and working in the best interest of the client, sometimes telling you what you may not want to hear.