How To Get Value From Your Financial Advisor

How To Get Value From Your Financial Advisor

There are two times in every business cycle where an Investment Advisor can add a great deal of value to their client.

We can add value at the top of the market where euphoria rules and at the bottom of the market when panic and a desire for capitulation dominate.

I think that euphoria is often mislabeled as greed. I think that it’s more than that. To me, it’s the complete loss of an adult sense of danger. In the euphoric state, investors unconsciously define risk as, ‘the danger that other people are making more money than I am’. When the euphoria hits you, you no longer fear or even accept the possibility of principal loss. Your only concern is that somebody somewhere owns stocks that are going up more than yours.

Panic invariably follows episodes of euphoria and is usually as deep as the euphoria was high. It’s axiomatic that the biggest bear markets are simply correcting the biggest bull markets. The market couldn’t have gone down 50% if it hadn’t just finished going up 12 times.

Hence there’s also a consistent relationship between the height of the mob’s euphoria at the top of a big bull market and the depth of their panic induced capitulation at the bottom of the bear.

It manifests itself as the unconscious belief that equity returns has been permanently broken, or at least that equities will not come back in the investor’s life time.

This time is never different. Neither the business cycle nor the market cycle has ever been, or ever will be, repealed.

It seems obvious because it’s obvious.

All market declines are temporary because the market propelled by the economy which it reflects is permanently rising.

All new eras end in ruin because all technological and financial innovation follows the same downwards arc from miracle to commodity.

So how does a trusted Investment Advisor add value at these times?

As an investment advisor, we often talk about ‘hand holding’ clients to get them through difficult markets

To me, it’s much more than that. Clients don’t get through times of crisis simply by having an empathetic and loving friend. Like Gordon Gecko said in the movie Wall Street. “If you want a friend, buy a dog.”

In my opinion, you manage panic by managing euphoria today.

Like any sport or business situation, success is achieved by planning and preparation.

The first step is to build and then constantly review your client’s their financial plan and the tradeoffs that the client decided to take. If their goals requires a 4% rate of return on their investments, their portfolio should look considerably different than if they need 8%.

The second step is to regularly rebalance their investment portfolios. Remember this is a risk reduction move and forces us to do what we should. Buy low and sell high!

My third point often gets overlooked. Don’t let investor’s in over their head. This is especially true for inexperienced investors. It’s been my experience that they are generally over confident, in determining how much risk that they can take. Theoretically losing 20% is considerably easier than actually losing 20% of your portfolio. What you don’t want is the ‘knee jerk’ reaction to bail out of a normal market downturn.

I think that the situation is very much like learning how to swim. Inexperienced investors should practice in the shallow of the pool end before they get dumped into the middle of a lake. After the new investor has practiced through a regular market cycle or two, you could increase their equity exposure to where they need to be in order to accomplish their investment goals.