The Standard and Poor’s 500 Index has declined over 10% in value from December 29, 2015 to January 20, 2016. Losses in one’s own account can be greater than the stock market as a whole and I have spoken with investors who have investment losses of over 20%. This can happen when one invests in the most popular stocks or funds – and when those funds suffer more losses than the stock market as a whole.
I hear every day how frustrated people are with their investments – but even more, how frustrated they are with the advisors who lead them into the investments that suffer such great losses. The frustration increases when they see how much they are being charged for poor performance. I have seen people’s accounts that have not only had losses over the past year, but have underperformed their benchmark over many years. However, the advisor who leads them into those investments is more than willing to keep on charging them for financial “advice.”
When you get financial advice and don’t even keep up with the S&P 500, why bother with a financial advisor or their fee when you could just buy an index fund and be done with it? I have talked to many people who have actually done that but, of course, that is no picnic either. These index funds or “ETFs” have their own level of risk and also have to ride the markets up and down no matter how deep the losses. In this scenario, at least you don’t have to pay a fee on top of the up-and-down ride.
I assume that most financial advisors want their client’s investments to increase in value as much as possible. There are two reasons for this:
- One, if they make their client’s money, those same clients are likely to stay with them and less likely to barrage them with angry phone calls;
- Two, the more money in the client’s account, the more money the advisor makes. So, there is plenty of incentive for the advisor to guide their clients toward making money.
Then, why doesn’t it work that way? I can’t say for sure, but I have a strong theory. It goes like this: Most investment advisors have a degree of schooling around investments. They either went to college and studied investment management or they learned it on the job – or both. In either of these scenarios, the advisor is usually subjected to conventional thinking in the investment industry. That thinking says to just put your money in the stock market and let it ride the ups and downs – but over time (in theory) you will make money – and usually that is the case. Of course, they seldom remind you of how rough the ride is going to be. So, when the stock market shakes you up a bit, it seems to come out from nowhere and catch you off guard.
The other part of conventional thinking is that if the stock market ride is too rough for you, you may be advised to add bonds or bond funds to the mix. But here’s the problem with that: The United States has generally been in a declining interest rate environment for the past 35 years. Of course, bond funds typically increase in value if interest rates fall. But what if we go into a period of time when interest rates generally rise? If that happens, bond funds may not look like a good insurance policy. With interest rates so close to zero, adding bonds or bond funds does not seem like a value proposition to me.
So, if you are sitting on losses in your investment account, what do you do now?
I suggest that you develop a clear and coherent strategy. In my opinion, the poor performing stocks, bond funds or mutual funds, which contributed to your loss, are not the best answer out. There are other methods to protect and grow your assets.
I have designed a specific stock ETF strategy to help clients who find themselves sitting on losses not of their making. If you need help, let me know and I will be glad to sit down and help you build a plan. You can reach me at firstname.lastname@example.org.
I am currently an investment advisor – but I did not start here. I owned and managed a successful business in another industry, the sale of which gave me money to invest. In seeking out options to support my retirement, I spoke with four investment advisors who were referred to me. The advice I received from each of them sounded sophisticated and varied at the time, but when I analyzed it, I realized they all were saying about the same thing: put it into the stock market. That was October 2007. I chose to not follow their advice, but I watched the output of their recommendations over the next 17 months. I saw huge losses devastate many of those who followed similar advice from investment advisors who kept them invested in the stock market without a plan to protect themselves from downside stock market risk.
All of the talk about diversification and investing in large cap, small cap, international, including precious metals and eventually bond funds did not matter when everything collapsed.
I am not clairvoyant and, like others, did not know what would happen after October 2007. I was also not a serious student of the stock market at the time. But, through careful observation, I realized that most so-called “experts” were also clueless and had no real strategy to truly protect investors’ assets. Their investment strategies were out of an “old playbook” that had ceased to work when it was most needed.
Realizing that I needed to know more in order to protect my assets, I spent the next 5 years researching how to truly protect my investments from downside market risk and quickly learned that protection from downside market risk is difficult to achieve—but doable. When I realized that what I needed wasn’t out there, I developed my own strategies to protect and grow assets (without buying bonds) and got licensed to become an investment manager so that I could share my strategies with others.
I have been a successful businessman and my perspective about choosing an investment advisor (or investment manager) comes from the entrepreneurial experiences I had as an outsider to the financial industry while it went through a collapse, along with the information I’ve accumulated by doing my own extensive research.
My advice is this—when choosing an investment advisor, there are 5 important areas to consider:
- Look at the performance of their investment strategies – especially during the 2008 market collapse. An advisor’s credentials, business school education, awards and accomplishments do not necessarily answer the hard questions about investment risk vs. return.
- Ask a prospective advisor to show and prove the effectiveness of the strategies they use in truly protecting money from downside stock market risk.
According to Wikipedia, there have been 21 major stock market crashes in the last 210 years, which is approximately about one every ten years. If history repeats itself, another major stock market crash will happen in the coming years. The famous money manager, Jim Rogers, says,
“The debt is going higher and higher. The money printing is going higher and higher. We’ve had 50 or 60 years of success in America. You’ve got to pay the price someday whether you like it or not. The longer you delay the day of reckoning, the worse the day of reckoning is going to be. This is not going to be fun.”
The actual date of the next stock market crash is not known. However, whenever that happens, as an investor, I would want to know that my advisor had a proven and effective way to help me avoid most of that risk.
- Ask to see the details of his or her real time performance – not just concepts and ideas, but the actual track record. While there are many regulations around what you can be shown, it remains possible to access some forms of historical performance data. Of course, past results are not a guarantee of future performance.
- Look for an investment advisor who is completely independent and is not beholden to any larger organization. Affiliations with outside organizations can create a conflict of interest in working in the best interest of the client. Those organizations will often require or “encourage” the promotion of certain strategies, managers, portfolios, funds or stocks. The average investor is shielded from the appearances of arrangements that incentivize biases. However, they clearly exist. While some investors have had good experiences with their advisor, others are disappointed with their investment performance and feel that it is not worth the fees and the risk.
- Finally, look for someone you can trust. All the other things mentioned above should be in place, but trust is definitely the top priority.
In conclusion, your advisor should be willing and able to answer your questions and have clear and proven strategies for protecting your assets from market risk. They should understand your goals and risk tolerance and choose strategies with you that will best achieve your goals.
Ben Reppond is CEO of Reppond Investments, Inc., a Registered Investment Advisory firm located in the State of Washington. Ben is located in Bellevue, Washington and focuses on conservative and risk-averse investing. He can be reached at email@example.com.