When it comes to providing a successful investment experience for your clients, one piece of advice I learned early on as an advisor is this: Play defense. If you can block the many incoming threats to your clients’ financial futures, you’ll give them a much better shot at achieving their goals than if you spend your time trying to play offense and make all the right moves.
The best way to play defense for your clients–and achieve maximum profitability for your firm in the process–is to keep them from making costly mistakes that can rob them of the money they’ll earn by simply letting the capital markets generate wealth for them. For example, if you had invested $1 million in a diversified portfolio 30 years ago and stayed with that portfolio, you’d have gained 16% annually and earned $85 million by the end of last year. But make just a few screwups, like timing the market poorly or concentrating the portfolio, and you easily could have cut that return in half.
I believe successful investing is like filling a bucket to the brim with water. As long as that bucket sits on a firm foundation, all the water stays in place and you get to keep every drop. As soon as you pick up the bucket and move it around, however, water starts sloshing out, resulting in the loss of a portion of what you had. The lesson is simple: The less “hands-on” you are with your clients’ portfolios, the better off they’ll be over time.
Two Ways to View Investing
What Your Peers Are Reading
This concept of doing less to achieve more is difficult to accept. After all, as human beings we’re constantly taught that to win we must always take action, show initiative, and get ahead of the game.
So how can you convince clients that making fewer moves with their money is the right thing to do? Just as important, how can you stay committed to that idea? So much attention is devoted to keeping clients on track that we sometimes forget that advisors face the same pressure to act as individual investors when it comes to making decisions on what to do with clients’ portfolios.
The key is to use the correct time unit of measurement or, as I like to say, “use the right lens.” You can choose to view the investment landscape in one of two ways: through an investor’s lens or a speculator’s lens. If you use an investor’s lens, you see that true investing is a process that occurs over time periods of 10, 20, 30, or more, years. Therefore, your opinions about the markets and portfolio management will be shaped by this long-term viewpoint. Of course, the vast majority of your clients have goals that require a long-term perspective, such as not outliving their retirement savings. An investor’s lens therefore allows you and your clients to make decisions that reflect their needs over several decades.
Unfortunately, the think-fast mentality of daily life discourages us from making decisions with a 20- or 30-year timeframe. As a result, most investors are much more likely to view the world through a speculator’s lens, which emphasizes extremely short units of time such as a single month, quarter, or year. Clients who see the world through the short-term speculator’s lens will believe it makes sense to frequently shift in and out of various markets and asset classes. They’ll want to take action with their portfolios every time a big political or market event occurs. Some may even want to avoid equities altogether because of the wide swings in performance that stocks often demonstrate over very short periods, such as one year.
The Wages of the
Short Term Focus
The repercussions of taking a short-term speculator’s focus instead of the long-term view of a true investor can be enormous. Consider the following results: