But, often, you haven’t made
anything unless you sell it! If one owned investments valued initially at $1,000,000 and those grow to $2,000,000 in value only to fall back down to $1,000,000 after a market crash, should they really
care about what were theoretical paper gains? (Believe me, they don’t.)
The investing public has been blinded by the metaphorical “food pyramid” of investing. Our clients have been taught—as most financial advisors are taught—to buy, diversify, and hold for the long term. They’ve been taught to have portfolios that are on offense, all-in, all of the time. They’ve been influenced and persuaded by materials produced by the largest fund companies in the world to never, ever sell. But why?
“How much do fund companies get paid if you SELL?”
I ask our new clients this question often and the response is almost as interesting as the question itself. People usually look at me in a state of confusion as they realize the answer is obvious. If investors sell their funds, the funds don’t
get paid! Of course they want you to buy and hold!
Those of us who have been through multiple market crashes in our careers have a chip on our shoulders. We’re frustrated with the industry for shoving modern portfolio theory (MPT) down our throats and for turning us all into robotic salespeople when we started. But let’s stop being frustrated for a moment. Those of us who practice tactical, proactive portfolio management and the buy-and-hold, MPT crowd do have one thing in common: a long-term time frame
Buy-and-holders say, “Think about the long term. It’s a marathon, not a sprint.” And you know what? I agree with them.
Now, I’ve gotten to know some amazingly successful, intelligent portfolio managers in this industry who do not share this opinion. I know a successful portfolio manager who buys “breakouts” with a 20-day to 50-day time frame. I know another analyst who owns an extremely successful subscription service, and he swing trades with a time frame that lasts between a day and a couple of weeks. One of the traders I most respect in the business often trades the overnight market, staying up all hours to do so very successfully, using his own proprietary algorithms.
My point? There are many
successful trading strategies that exist that are not
focused on the long term. But I’m going to go out on a limb here and suggest that the majority of us who manage our clients’ hard-earned retirement assets are doing so with a long-term time frame in mind.
Almost every client you and I work with has “now,” “later,” and “never” money:
- Now money: Clients plan on spending this money within the next two years. It should not be invested in the market or any other risk-on assets.
- Later money: These are assets for goals with time lines before retirement and assets that are going to be used to provide income after a client retires.
- Never money: As a fee-only firm, we don’t sell life insurance, but this is essentially what “never” money is: assets that are preserved for the sake of ensuring that a retirement plan doesn’t blow up in their heirs’ faces in the case of an earlier-than-expected passing of one of the major breadwinners in the family.
We also have the debatable “risk profile” to factor in. At our office, we like to say that the risk profile provides us with information that suggests what the client wants
. On the other hand, a comprehensive, written financial plan tells us what the client needs
from a risk-management standpoint. Naturally, we prefer to recommend what our clients need
—not what they want
. The risk profiling just helps us frame the discussion in the face of potential emotional biases.
In my 16-plus years of experience (which included two market crashes), what I’ve learned is that clients both want and, in almost all cases, need to avoid market crashes—plain and simple.