CKBlog: Standards

Friday, February 19, 2016

My Painter Arrived Today with His Investment Account Statement

My painter arrived at my house this morning with his Investment Account Statement. One of his comments to me was, “Am I going to lose all of my money?”

My wife and I are having some rooms painted in my house. Over the last week or so, I have gotten to know the painters pretty well. They are great guys, really hard workers and my wife and I are loving their work. At some point, one of the painters, a very friendly, middle-aged man, sparked up a conversation with me regarding the markets. I was very impressed with how much he knew about the recent volatility. It was clear that he was following the markets very closely. And this morning I found out why.

Per usual, he arrived promptly and greeted me with a smile and a handshake. After our usual routine of going through today’s plans, he pulled out an envelope and said, “So I brought my investment statement. Do you think we could go over it?” I had previously told him I work for a wealth management firm.

So, at my kitchen counter, we rolled up our sleeves and dove into the statement. Long story short, the result of the conversation was that he planned to sit back down with his advisor to better understand his investments and how it relates to his objectives. Likely, some changes will be made.

One of his comments, however, really stuck out to me. After I described his investments and explained why the performance had suffered (mainly due to his specific asset allocation), he kind of smiled and said, “So I am not going to lose all of my money?” He seemed comforted.

His investment portfolio was down roughly 20% in the last two years. Clearly not a good result. But what struck me most was that while he was super knowledgeable about the recent events in the markets, and could articulate to me how Fed Chair Yellen’s comments might affect emerging market equities, he had no ability to articulate to me how the portfolio was invested. And it was keeping him up at night. Anxiousness, confusion and lack of sleep will also increase the probability of making irrational, emotional decisions. My painter was debating selling his entire portfolio and converting it to cash, yet the portfolio was designed to support him in his retirement which he estimated to be 10 years away.

One of the fundamental pillars of a building a solid financial game plan is that the investor must understand what they own and how it relates to their objectives. Because when markets are volatile (like they are now), we have found that having a thorough understanding of your portfolio will help you sleep at night and will prevent you from making emotional decisions.

And when investors act with emotions, they lose. A widely cited study, called DALBAR’s Quantitative Analysis of Investor Behavior, compares investors’ average annual returns to average market returns, as measured by the S&P 500 Index. Their latest report, which covered 30 years ending Dec. 31, 2014, showed that the average equity investor earned 3.79% while the S&P 500 Index averaged 11.06% during the same period. One of the many conclusions of the study was that the average investor generally sells low and buys high; the opposite of the popular adage. 

Perhaps famed investor Peter Lynch said it best, “The key to making money in stocks is not to get scared out of them.”

This phenomena crosses all ethnicities, professions, backgrounds and investor’s net worth. In fact, I have met with potential clients worth well over $100 million who suffered from the same confusion regarding their portfolio and admitted it contributed to making costly mistakes.

One of the pillars of what we do here at CastleKeep is to help educate clients (as well as their children) about how their portfolio is positioned and why it makes sense for their very specific situation (every portfolio is unique, we currently don’t use models). We spend a lot of time on this. It helps us have more reasonable discussions with clients in times of stress. We believe that this helps prevent clients from making emotional decisions which go against their long term objectives. Helping them sleep is also nice ...

So if your portfolio is keeping you up a night, spend some time to review your holdings and rationalize why you own them. If you are having trouble doing this, please give us a call.

And if you need a good painter, I have just the guy for you.