A Tale of Two Clients, Some Other Stuff, and a Thanksgiving Prayer.

Do you remember how it felt to be a common stock investor during the last 5 years of the 20th century? It felt good. Very good, in fact. The total return of the S&P 500 stock index was 26.39% per year from January 1st, 1996 to December 31st, 1999. Every investor was a stock picking genius. People retired early. One of our favorite clients, a CPA, referred one of his clients to us in 1998. She was a young, single attorney. We welcomed her and invested her portfolio as we usually do across multiple asset categories with the intent to participate in stock market gains and limit stock market losses. During her year with us her portfolio gained a bit more than 15%, against inflation of less than 3%. However, the S&P 500 index was up about 25% during that period. She decided that 15% was not acceptable. She could do better. We do not know how she has done since then, but we do know how the S&P 500 has done since then. In 2000 it lost 9.1%, in 2001 it lost another 11.89% and in 2002 another 22.1%. So, during those three years investors in the S&P 500 lost nearly 40% of their value. As for our client, we wonder if she decided to invest more conservatively after her first few years of investing experience.

Which leads me to tell you about another client. We managed this couple’s investments for several years with good results. Then came the global credit crisis of 2008. Even our broadly diversified clients lost value, typically about 23%. The S&P 500 lost considerably more than that. Our client couple was very afraid. They feared that they would lose more, and more. Against my recommendation they decided to liquidate their diversified portfolio in favor of a guaranteed insurance contract, a contract that would grow and/or pay an income at a guaranteed, but relatively low rate. We don’t know exactly how they have done since then, but we know how the investment markets have done. Since January of 2009 US large stocks have gained an average of about 17% per year. Emerging markets over 13% per year. Non-US developed markets nearly 7% per year. We are confident that our client couple would be better off today if they would have remained invested.

The moral of the story of the two clients is that a good investment strategy, if followed, can lead to good investment results. However, sometimes investors abandon good investment strategies because “bad” markets cause them to doubt that economic growth will return. And sometimes good investment markets cause investors to believe that good times will last forever. Being too committed to risky assets can lead to frightening and unnecessary volatility, which can ultimately result in buying high and selling low. And being too committed to safe assets can lead to unnecessarily low investment returns over time.

It’s a problem. How can a consumer determine if a financial adviser knows what he/she is talking about? Often people look for the trappings of financial success – a fine office with glass doors and fine furniture, an expensive watch, an expensive business suit, an expensive car. These things may (or may not) give evidence of the financial success of the adviser. And whether financial success of an adviser leads to a client’s financial success is yet another matter. The brief video below takes a somewhat humorous look at this problem.

Do you ever wish you could review a topic discussed in this blog, but can’t remember where it is posted? No problem. Just type a key word or two into the search window above the Recent Posts listing and, viola! Your desired blog posting will appear.

It is during this time of year that we traditionally pause to consider and appreciate some of the finer things in life – family and friends. And food. And football. It is my prayer that you receive and enjoy the blessings of family and friends. And food. And football. But especially family and friends.

An elderly man in Phoenix calls his son in New York and says, “I hate to ruin your day, but I have to tell you that your mother and I are divorcing; forty-five years of misery is enough.” “Pop, what are you talking about?” the son screams. “We can’t stand the sight of each other any longer,” the old man says. “We’re sick of each other, and I’m sick of talking about this, so you call your sister in Chicago and tell her,” and he hangs up. Frantic, the son calls his sister, who explodes on the phone. “They can’t get divorced,” she shouts, “I’ll take care of this.” She calls Phoenix immediately, and screams at the old man, “You are NOT getting divorced. Don’t do a single thing until I get there. I’m calling my brother back, and we’ll both be there tomorrow. Until then, don’t do a thing, DO YOU HEAR ME?” and she hangs up. The old man hangs up his phone, too, and turns to his wife. “Okay,” he says, “they’re coming for Thanksgiving. And we didn’t even have to pay for the plane tickets!”

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