Actions Have Consequences

Todd Washburn |

Actions Have Consequences

August 30, 2011- Etip 37

In speaking with other financial planners, there seems to be some agreement that clients- or more likely prospective clients- often feel that the advisor’s primary benefit/value is in making them more money than they would themselves.  I think most if not all planners would like that to be the case too.  It’s easy to see value when the numbers get larger.  But our thinking isn’t necessarily in lock-step with the client’s.  We see two ways to make our clients money.  First is what the client thinks- pick better investments.  But there’s another way, and I think in some ways a more important one- reducing the losses or missed opportunities due to ill-timed actions.  In other words, not just making more money but actually keeping more money.

A recent study of 7.1 million accounts by Fidelity, the largest workplace retirement plan and IRA provider in the world, highlights this point.  The study looked at the 401(k) balances now relative to the actions the account holders took following the market crash of 2008.  The study focused on those who moved their money completely out of equities (stocks) sometime between October 1, 2008 and March 31, 2009.  Some the key findings:

·         For those who did NOT move out of equities, as of June 30, 2011, their account balances were up 64%.


·         For those who DID sell out, and stayed out through June 30, 2011, their balances grew all of 2%.


·         For those who sold out, but jumped back in at some point, their balances grew 25% on average.

In each case the increases reflect both continuing contributions by the employee as well as market gains or losses.

·         One other group stayed in equities but didn’t make any further contributions during this period.  This may have been because of a lack of faith or lack of funds due to job loss during the period.  Account balances in this group average 26% higher.

Obviously we’re looking back, and hindsight is 20/20.  There were financial planners who sold investment assets for their clients during that period.  Others didn’t.  Some sold but then bought their way back into the market.  There’s always an ideal strategy and it’s always easy to find- after the fact.  My point here is that investors often shoot themselves in the foot.  They sell low and don’t get back into the market until they’re “sure”- and then buy high.  One important responsibility a financial planner takes on when he or she manages money for clients is to help the client avoid impulsive, harmful actions made in the throes of panic.  It’s not that the advisor will always be right.  But he, perhaps because it’s not directly his money, can remain a little more dispassionate, and perhaps calmer.  He knows that if you decide to sell, you’ll need to later decide when to buy.  He knows that just as there can be a cost of being in the market as it declines, there can be a cost from being out of the market when it rebounds.

My point is, if you found yourself contemplating major changes to your investment portfolio during the recent market unrest, ask yourself if what you were contemplating was out of fear or part of a well-thought-out strategy.  If it was the latter- great.  If it was the former you might consider speaking with a fee-only financial planner to develop a strategy to deal with market volatility.  It could be that you just get help with the strategy, or you hire the advisor to implement it and help you not only make money but also not give money up because of decisions made out of fear and without a plan.

If you weren’t aware, I do portfolio reviews and can help develop investment strategy.  And for those who desire, I will manage your investment portfolio for you.  What separates my service from that of many other investment managers and brokers is that in addition to the investment management services, my Wealth Management clients also receive my full Life Planning financial planning services.  It’s integration of the financial plan with the investment portfolio, all for a fee that may be no more, and often less than what others are charging for just investment management.  My Introductory Consultation meeting is free.  It’s an opportunity for us to meet, discuss your situation, and decide how I might best help you manage your finances as you pursue your life goals.