12/12/12

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There was an interesting article at the WSJ about how one RIA's clients' sentiment toward stock (or equity mutual funds) has changed over the last few years presumably as a result of the second 50% decline in just eight years.

There were several fascinating behavioral lessons in the article that I think we can learn from. About one client who is a doctor the article said that "between surgeries, he said, he consults his iPad a dozen times a day to check the stock market. Any sign of a big downturn, he said, would drive him out."

I don't know whether any of our firm's clients check the market that frequently but the doctor, who is 59, seems like an own worst enemy situation waiting to happen. Assuming he meant it that there is a scenario where he could see something on his iPad in the middle of his work day that could cause him to be driven out, the client realizes the emotional nature of how he views the market but is apparently willing to let emotion drive the decision making process. From where I sit that is very likely to end badly for the client.

Zooming out, the article cited an undated but presumably current Gallup poll that counted 53% of Americans with equity exposure one way or another. That compares to 65% in 2007. That is a meaningful decline IMO and is consistent with what most of us probably know anecdotally. The advisor profiled in the article talked about how he stresses the need for equities in a financial plan in order to get the long term growth that most people need. I would tweak that a little by saying that equities don't ensure a successful financial plan they just give a better chance than other asset classes.

I would also add that anyone who for whatever reason does not want equities needs to realize that something will have to give. The person who forgoes the growth opportunity that equities provide needs to save more along the way, be prepared to stay in their career job longer, work in some sort of post retirement job when they leave their career job, live a more modest lifestyle or any combination of the above. Of course all of the above would be easier for someone who is able to live well below their means.

One last item of interest was the story about the advisor's wife who manages her own portfolio. how her purchase of Facebook (FB) didn't go well and that she has decided to swear off equities because of it.

This seems odd for several reasons. Presumably there is an expert in the family but she preferred to invest without him. She speculated on what was quite obviously going in a very binary event (the IPO was either going to be a home run or be a dog). Her husband, the advisor, can't bring her in off the ledge. It is possible that I am simply projecting the dynamic of my household because the profiled advisor is about my age and our household appears to be much different than his and so perhaps other people wouldn't think it strange at all.

One final note for RIAs is that based on the article it did not seem like the advisor spent time on the right kind of education for his clients. There were two references to his pointing to that Ibbotson's chart (or something like it) that we have all seen that shows stocks blowing away every asset class since the 1920s.

Obviously on this site we talk a lot about what is normal cyclical activity for markets, messages of the market (not a term I made up) and other things to try to prepare for the inevitable large declines and then how to manage the portfolio during the inevitable large declines. All of our clients know about the blog, that this information is easily available in what I hope are digestible doses and I hope they do visit the blog every so often (at crucial points we also send out emails to out client base).

The way I view the best way to keep clients is to prevent them from panicking or more correctly trying to prevent them from panicking. The best way I can think of to prevent them from panicking is proactive communication to remind them how markets work and to focus on avoiding succumbing to emotional responses.