Thursday, June 28, 2012

The investor stomach...

Stock index futures, alas, are pointing to a less than savory open on Wall Street. Now I must confess, I generally feel better (in a knee-jerk sort of way) when the arrows are green. I feel better because my clients feel better. You see I am an investment consultant. And I therefore deal with futures on an everyday basis. People futures that is.

I do not subscribe, as do many in my vocation, to the notion that I'm in the "expectation management" business, that's too condescending for my taste. I'm not here to "manage" my clients' thoughts, I'm here to help them manage their portfolios in a manner that melds with who they are - with how they think (although I will effort to educate along the way). And that's an entirely different proposition altogether.

Now I can preach and cite history till I'm blue that an "investor" is not a trader, that investors always want to own viable businesses when traders and panickers are selling them (btw, panic comes wrapped in the bursting of tech bubbles, real estate bubbles, government bubbles, etc.). And when times are good, my clients, on that topic, are one big consensus of nodding heads. However, it's when times are "bad" (I use quotes because, to a volatility-tolerant investor, "bad" times are good [cheap] times) that we separate the nodders from the shakers. And of course there's no right or wrong, there's only personalities.

Investment mistakes - that is, mistakes measurably impacting long-term results - are forever emotionally based. That would be greed (think dotcoms in the late '90's and real estate in the mid '00s), and fear (think selling stocks in early '09 and buying bonds in early '12). If I've done my job well - if our clients' portfolios are allocated in a manner consistent with who they are - our clients are not making these mistakes.

So the challenge - yours and, if you're our client, ours - is to understand what makes you tick, and what keeps you up at night. That is, to what extent you can stomach the prudent investment process (owning equities in a globally diversified fashion, then rebalancing against the herd twice a year). Or, in other words, to what extent you can resist making emotion-driven decisions. I.e., it's your stomach I'm ultimately concerned with...

On this subject, here's a letter I wrote to clients back on July 6th, 2009. The Dow closed that day at 8,325...

Just the other day I noticed, in a shady corner of the backyard, there appeared to be just one tall pine tree, where there was originally two. Ten years ago I planted identical twins. One facing the open yard, the other in the corner, guarded by the fence and neighbors

1 comment:

  1. Your Comment
    I do clearly remember that story in 2009. It was a very good way to explain some of the hardships as investors we feel at times, but staying the coarse is usually best.