Cycles of Dumb Series: Week 1
By Gary Silverman, CFP®
A couple of times in the last few years I’ve talked about a Vanguard study on the value of financial advisers. According to that study, one of the major contributors of an adviser’s worth is keeping their clients from doing something dumb. I have two things to say about this.
First, “doing something dumb” is not the insult it seems…it’s just a description of humans being humans. For instance, a few years back in order to reach a high shelf, one of my staff used a chair. The problem? It was a swiveling office chair and she was in high heels. Let’s just say it seemed like a good idea at the time. She wasn’t dumb; she was just doing a dumb thing (and thankfully got away with it).
Likewise, most humans are not dumb. But all humans do dumb things. It’s not that they lack basic instincts of what will succeed and what will fail. Rather, we react in our modern society the way we are programmed to act out in the wild. Take my rather brilliant employee. If the situation was that a tree had life-giving fruit on it and she had to pile up some rocks to gather the nutrition needed to sustain her life, then standing on an unsteady platform is likely worth the risk of a fall. A box of file folders is much less of a survival situation and not worth the same risk taking.
What about the world of investing? Back in 2007 I had a client cash-flush from a recent sale of a business. The market wasn’t exactly low (though I can’t say I was predicting the debacle that was a year away) and I recommended we take a couple of years to slowly move the money toward our target allocation of about 65% stocks and the rest in a variety of other investments. He agreed to the plan.
Well, in 2007, the stock market was steadily rising for most of the year. My client was getting a bit peeved seeing so much of his money in cash that I’d get frequent calls from him complaining that he was losing money not being in the market. Finally toward the middle of the year he ordered me to go ahead and fully invest his money.
By September of the following year, he had fired me. He felt I didn’t get him out of the market before he lost money. It didn’t matter that he was the one who had told me to invest a lot more a lot quicker than I recommended. All he knew is that I kept him from making money when the market went up, and I let him lose money when the market was down.
My client wasn’t being bizarre, he was just being human. The market had a long, steady upward trend and he went from neutral, to optimistic, to extremely excited: He was sure there was no way he could lose in those market conditions. So, he threw caution to the wind.
He certainly wasn’t alone.
Next week, we’ll start to uncover how a lot of other folks’ mistakes might keep you from making dumb decisions with your own portfolio.
This article was published in the Wichita Falls Times Record News on August 21, 2016.