Advisor not needed in good economy
I’ve been looking back at some lessons I’ve learned as a way to celebrate 20 years with my firm. Some lessons are good for investors, some for owners or managers of businesses, and some may only apply to me. Today I want to look at why, when the stock market has been doing very well, there is a dearth of prospective clients coming through my door.
Back in 1999 I noticed that what had been a steady stream of folks coming in to check us out had begun to wane and fewer of those who did come in decided to become clients. Why, I wondered, since the market kept doing well, was this happening? I was puzzled for many years. It was only recently with years of hindsight and the reading of many behavioral finance articles that I may have come up with the answer.
Folks stopped coming because they were sure that they could make money…lots of money, without me. The reason why those who came in weren’t converting to clients was that they were sure that while I could make them money, they could make more money on their own. Sounds silly, doesn’t it? Thing is, they were right.
Does this mean after 20 years I should be shutting down my practice and let my clients do everything on their own? Well, no.
What was happening back in the late ‘90s was a bubble building up in the market. The same thing to a much lesser extent happened before the recent financial crisis. Whenever a bubble occurs, no matter what market it is occurring in, all you need to do is be invested and you will be rewarded. And at its extremes, there is little that an investment professional can do to add any more oomph to what is already going on. That is why folks who thought they could make money…good money…without my help were absolutely right—so why bother coming in in the first place?
That second group—the ones who checked me out—they came away figuring that they could make more money than I could. They too were right. In a bubble situation, the people making the most money are those who go all in and fill that one market basket with all of their eggs, resulting in earning more during that time. In 1998 and 1999, it’s true that my clients’ portfolios were doing worse than the NASDAQ, S&P 500, or pretty much any stock index out there. And that’s what I expected.
You see, I’m not one that likes seeing a lot of eggs in a single basket except around Easter. As readers of this column know, I preach diversification. I preach it because in times of trouble it can save a portfolio from ruin. On the flip side, it also means that in times of plenty you leave some profits on the table. That’s what was happening in the late ‘90s. By not being all-in in stocks, the portfolios underperformed, relative to the single-basket folks. I lost a few clients, however, those who stayed the course were thankful once the bubble burst and the basket tipped and left behind a big mess.
This article was published under the title "In bubble, people fare well on own" in the Wichita Falls Times Record News on October 12, 2014.