When things go wrong, it’s good to know a pro
Q: I have a friend who really likes to talk about his investments. He has an account he manages on his own, and he also has an account managed by a professional. He’s always saying he can beat the pro, but he never fires the guy. I think my buddy may be full of hot air. But shouldn’t a pro be able to beat an amateur? Otherwise, what’s the point?
A: A professional should always add value. Otherwise, as you say, what’s the point?
But whenever I hear someone speaking of investment returns using competitive terminology (so-and-so “beat the market”), I’m most often hearing the opinions of the inexperienced.
Investments are long-term in nature. How an investment account performs in a single year, or even over a single five year period of time, may not tell the whole story.
Investment markets go through ups and downs, euphemistically known as “bull” (up) and “bear” (down) markets.
Bull markets are characterized not only by the upward movement of the markets, but also by the optimistic outlook of investors. There is an old saying that bull markets make geniuses out of us all. These are the times when individual investors most often call up their investment advisor and ask, “If I’m doing as well managing my 401K as you are managing my other investments, why should I be paying you?”
The answer may come during the downward phase of any market cycle, the so-called bear market. Bear markets are easy to discuss now, since it’s been a while since we experienced one (about 10 years since the last one started). We can all repeat the mantras we’ve heard about “hanging in there” when markets go down.
It’s the difference between someone who’s read all about hurricanes, and someone who has actually been through one. You can read all about hurricane parties and false alarms and bravely toughing out the rough weather.
But when Hurricane Harvey hits and rain of biblical proportions falls from the sky relentlessly day after day, your attitude changes from detached confidence to desperate fear.
So it is in a bear market. If you have significant amounts of money tied up in the securities markets (and who with a 401K doesn’t?), you could have half of the value of the account washed away in the market hurricane.
Sure it’s always come back before. Or almost every time.
Then you read about a time in Germany when the market never “came back” and participants lost all their money. Or in Japan. Or in Brazil. Or even in the United States some 90 years ago when markets lost 90% of their value and took most of a generation and a world war to recover.
The question of whether your investment professional is adding value should be evaluated over an entire market cycle. That can be ten years.
It’s a fair question to ask your investment professional, “What is our plan in the event of a bear market?”
“We’re just going to hang in there because markets always come back,” is a fair answer, and one you may hear often. It is, however, just slightly optimistic. Markets have come back…most of the time.
“I’m going to get you out before it happens,” is a fairy tale answer. This is not the answer of an advisor, but of a witch doctor. Find another investment advisor if that’s the answer you get.
Or your advisor may have another way to mitigate the damage once the bear market has begun. That’s also a fair answer, but make sure the plan as explained to you makes since and has been executed effectively in the past.
Securities markets are wonderful wealth creation vehicles for the average American.
And electricity can add wonderful, almost unimaginable benefits to our modern lives.
But both are deadly when mishandled.
Sometimes you can do a wiring job for less than a licensed electrician could.
Sometimes you can make investment management decisions as well as your professional advisor does.
In either case, the time a professional who knows what he’s doing showcases his value is when things are going wrong.
When the lights go out, when the hurricane comes, when the markets fall…it’s good to know a pro.
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