Here’s a quick lesson in human behavior:
Fed quantitative easing, problems in the Ukraine, soft volume numbers in the stock market. It seems like a recipe for more downer days in the stock market. It’s also a recipe for worriers to worry even more.
…Yet the market continues to roar back.
Did you get caught?
Did you move money to the sidelines when the market was low and then miss out on the upswing (essentially losing money and locking it in….).
A better question might be: did you do anything at all?
When I was an advisor we had some clients who wanted to see some action if the markets sank. We should be doing something, dammit!
The more experienced guys in the office insisted that we talk about re-diversifying the portfolio with our clients like the guy helping ease the suicidal lady off the window ledge. It didnt matter that we already had damned good diversification in our portfolios.
When the markets moved, here’s how we’d end meetings:
We’d move a few things around to prove to clients that we were doing something about it.
That was “the show.” Let me tell you what we were really doing:
…we were watching the market very closely and hoping that it rebounded soon. That way, the phone calls from clients would stop and we could quit pretending to be market gurus (even though we’d been insisting with our clients that we weren’t market gurus….AND that there’s really no such thing……).
At first I thought this was nonsense.
The Truth About Client/Advisor Relationships
Why would we move a few funds around if we believed they were the right places to invest? Why would we abandon the strategy? A friend of mine, we’ll call him Joe, told me everything I needed to know about human behavior my second year practicing.
He said, “Either they’ll get rid of the fund they don’t like or they’ll get rid of you. Which would you prefer?”
You know the answer to that one.
So, answering my own question, it was nonsense for the client, but made perfect sense for the advisor. Sadly, most clients thought that it made sense also.
Let’s set the record straight.
If you have a good fund with a track record and your long term diversification says to keep that fund, you should hold on to it. Don’t just hold on with your eyes closed and teeth clenched; hang on while knowing what you’re doing. Here is what you should know:
1) Make sure your fund is keeping up with its benchmark. Some funds track the S&P 500, while others follow the NASDAQ or a certain sector of the market. Use Morningstar.com to find out what your fund tracks and to see if it’s keeping up with ‘the Joneses.’
2) Is your goal still the same? If you have a fund, it’s really only a fuel for your goal, isn’t it? When your goals change, your diversification should also change. If you’re in the best fund in the wrong part of the market, you’ll never be able to use the fuel.
3) Pay attention to taxes and turnover. If your fund is outside of tax shelters, track a metric called turnover (also found at Morningstar.com or any of the reliable search engine sites). Turnover show how much of the portfolio your manager is churning to keep his head above water. This movement can create taxes and unnecessary expenses. Turnover of 100 percent means that all of your positions are changing in a twelve month period.
So the market’s been moving around…..what do you do now? Check out your funds to make sure you’re in the right spot to meet your goals, and then do nothing.
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