Benjamin Graham’s famous book, The Intelligent Investor, offers insight into the most important trait in investing, discipline. Graham explains you don’t have to be smarter than the rest, just more disciplined than the rest.
We often think investment success is achieved by picking the next hot stock or manager/fund that’s been beating the market, but that is a flawed approach. In the words of Graham, “The best way to measure your investing success is not by whether you’re beating the market but by whether you’ve put in place a financial plan and a behavioral discipline that are likely to get you where you want to go.”
While all advisors and managers strive to outperform the markets over time for their clients, the single biggest thing a good advisor can do is be there to act as your behavior coach.
Many studies show investors are often their own worst enemy, letting emotions drive their financial decisions. This ultimately means doing the wrong thing at the wrong time for the wrong reasons. Advisors are there to work with you to help you determine your goals and craft a long-term plan funded with a long-term portfolio. Together, you continue working the plan through all the cycles of the economy, and all the fads and fears of the market.
While being disciplined, rational and level headed may sound easy, what happens when the market suddenly drops, media heads are screaming “it’s just the beginning” and you see your portfolio lose $10,000? Fear sets in and many start to panic. This is due to loss aversion and our internal instincts. The satisfaction lost by a person who loses $1,000 outweighs the satisfaction they gain by winning $1,000.
DALBAR, an independent financial company that evaluates investment companies, registered investment advisors (RIAs), insurance companies, broker/dealers, retirement plan providers and financial professionals, has been analyzing investor returns for over 20 years. The many studies they’ve performed show the average investor consistently underperforms the market.
The DALBAR studies show investors continue to buy high and sell low, despite knowing better. Investors can easily fall prey to a myriad of pitfalls, and recent technological advances have made it even worse. We’re in a 24-hour news cycle and can access our investments and place trades with a few swipes or clicks. The technical and emotional guidance needed is something that only a trusted, human advisor can provide.
While the emotional aspect is invaluable and hard to sum up, a trusted advisor should also be there to help you with your investment decisions and financial management. From an investment perspective, they should provide continuity for your entire family, periodic rebalancing of your portfolio, tax minimization and should constantly pursuit better investment solutions.
From a financial perspective, an advisor should help you define and achieve all that’s important to you with the greatest comfort and success, whether your goals are related to preserving the wealth you have accumulated, mitigating the taxes on what you have, protecting your assets from being unjustly taken, or maximizing the effectiveness of your charitable giving.
We know it can be hard to see the value of advice and actual difficulty of discipline, especially when we’ve been in our current bull market since March 2009. It’s times like this when investing looks easy. I’ll close with the following story of my meeting with a new client. During our initial call and review of his assets, I saw he had many long-held stock positions, a lot of cash and some mutual funds. He had self-managed his portfolio up to this point. I asked him to help me understand it and how he had made his decisions. He sheepishly explained that both his desire to hold on to stocks that were underperforming, as well as his large cash positon, were based on his emotions; he couldn’t part with stocks from companies he liked and he feared the ups and downs of the market, with all the political happenings. He admitted he knew he had missed out on investment returns by keeping so much in cash, and that he should have moved capital from stocks to the better-performing mutual funds. He said talking to me was helping him see all the things he should have done. He said, “You know, I could invest anybody else’s money better than my own…this is why I came to you.”
*The original analyses began in 1984, so that between 1998 and 2002, the period covered was less than 20 years. Since 2003, however, the long-term analysis has covered a 20-year time frame. Source