The Three-Legged Stool.
Posted on February 14, 2012
Filed Under 401K, Fidelity Investments, Investment Strategy, Investor Mistakes, Mutual Funds, Personal InvestingAfter more than a quarter century of working with investors, I can list with some certainty the three factors that most affect client investment returns:
- market movement
- advisor investment selection
- client behavior
None of us can do anything about the movements of stock and bond markets; they will do what they will do. And of course, as advisors we control which stock and bond mutual funds go into our clients’ portfolios. But it’s the third leg of the stool, Client Behavior, which is the most precarious and unpredictable. Despite all my efforts, clients will do what they do, and that’s not always a good thing.
Recently a client who has been with us for many years expressed dissatisfaction with the returns on one of his two accounts. He is a successful physician and an experienced investor, so he knows quite a bit about the world of money. Yet I was flummoxed by what he was saying to me.
He had been in an aggressive portfolio but in 2009, near the very bottom of the bear market, he requested that we change it to a more conservative model. My suggestion that we ride through the bear market fell on deaf ears. And as happens so often, he ended up getting the worst of both worlds – he locked in his losses and didn’t get to fully participate when the market rallied strongly after we made the change he wanted.
Yet when I pointed out what happened, he put the blame on us, seemingly unable or unwilling to see that it was his behavior which caused his returns to lag. I always urge clients to stick with their plan through the inevitable and unavoidable rough seas of mutual fund investing. Most clients follow that advice, but not all.
As our long-term clients know, we stress the importance of looking beyond market fluctuations. Those waves never cease. But if you try to guess when to get out, and then when to get back in, you must be right twice. That’s not easy to do, and it almost guarantees subpar performance.
We are proud of our long-term track record for “Advisor investment selection.” To get the most benefit from our strategies, we strongly suggest you change your risk level only if your financial situation changes.
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