This article was originally posted on Advisorpedia.com.
Many people think investing is easy. You’ve heard “Don’t confuse brains with a bull market” (Humphrey B. Neill). With the arrival of virtually commission free trading and robo-advisors, many people say to an advisor: “I don’t need you.” What now?
“I don’t need you.” When you look at the Ibbotson mountain chart, it’s obvious the stock market has performed well over time. Discount brokers, no load mutual funds and index funds have been around for a long time. So why isn’t everyone rich? How does an advisor add value?
Seven Reasons Why Everyone Isn’t Rich
Looking at the mistakes individual investors often make is another way of looking at how professional investment advice adds value.
1. They don’t leave things alone. “Money is like soap. The more you handle it, the less you will have” (Eugene Fama). The Ibbotson mountain chart shows returns assuming you invested in the broad market and left your money alone. People get scared. They jump into and out of the market. They lose interest. Advisors are good at focusing attention and handholding.
2. They buy high and sell low. You’ve seen the statistics about the difference in returns between the average growth mutual fund and the average fund investor. Dalbar does those studies. They measured 20 years back from 2015. The S&P 500 averaged 9.85%. The average equity fund investor averaged only 5.19%. Left on their own, many investors don’t “stay the course.” Advisors help put things into perspective.
3. Coming back from the dead. Over time, many investors have been attracted by the idea of buying into famous names like Pan Am and Braniff that were on the edge of bankruptcy. The idea was these companies had underlying value or would recover. Most didn’t. Advisors let clients know stockholders are almost last in line behind employees, vendor, the government, banks and bondholders. “Pennies on the dollar” is what bondholders often get. There are no pennies left for shareholders.
4. They lose interest. They get interested in investing, then the football season starts. They get involved in dating. Investing takes a back seat. Because of the global nature of markets, things are happening 24/7. Good advisors introduce clients to professional money management. They can outsource day to day decision making while still being involved in the market.
5. They obsess. It’s the opposite of losing interest. They are transfixed by the stock market. They become day traders. Cumulative fees, capital gains taxes or impulsive decisions eat into their capital. Advisors help clients understand certain monies are put to work long term and smaller amounts can be used for trading or other riskier activities.
6. They don’t diversify. Years ago, there was an investing expression “Have a hunch, buy a bunch.” It described a bad behavior. It implied people didn’t think things through, but it also meant they didn’t spread risk. Around the time of the dot.com boom (and bust) people thought owning six internet stocks meant they were diversified. They weren’t. Even if they owned six similar mutual funds, they were unaware each fund owned mostly the same stocks as their top holdings. Advisors can explain this plainly.
7. They think they are a genius. It’s back to “Don’t confuse brains with a bull market.” Investors have access to lots of data, but that doesn’t mean they use it. They act on hunches or have a market guru they follow. That guru thinks the same way as they think, so they must be right. Many advisors have a huge “bench” or research analysts. They have research they can draw upon.
Discipline is a common theme running through these seven mistakes. That’s a key area where advisors add value.
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