The Value of a Financial Advisor
Published Thursday, May 28, 2009
Many individuals have been burned by investment advisors in the past. They have paid anywhere from 1-2% of the value of their portfolios to money managers who have promised to outperform the market – only to find that they have underperformed the market by 1-2% (the amount of the money manager’s fees).
In fact, over five years ending in June 2008, S&P 500 outperformed 68.6% of actively managed large cap funds, S&P Midcap 400 outperformed 75.9% of mid-cap funds and S&P Small Cap 600 outperformed 77.8% of small cap funds. It is no better for international actively managed funds where the S&P Global 1200 outperformed 70.1% of global equity funds, S&P 700 outperformed 86.5% of international equity funds, and S&P IDCI Composite outperformed 73.9% of emerging market funds. With those kinds of odds, who would pay more in fees to try and beat the index? That is why we at Mark Stempel & Associates believe in passive investing and choose to use index and exchange traded funds for our clients.
Based on the above facts, there are some investors who have chosen to go it alone. They say: “All I have to do is invest in a diversified portfolio of index funds”. The facts show otherwise. On their own, individual investors tend to significantly underperform the markets in which they invest. One study showed that the average individual investor’s annual risk-adjusted performance was 3.7 percentage points below the market as a whole. Another study by Dalbar concluded that the average equity-fund investor realized an annualized return of 5.32% compared to 16.29% for the S&P 500 Index from January 1984 – December 2000.
Why the large discrepancy between the return of the index and the return of individual investors? The study mentioned above attributed the 3.7 percentage point difference to people’s overconfidence in their investing abilities. It’s not that they didn’t have a plan. In fact, may individual investors have detailed, well-thought out investment plans. It’s that the plan changed and then changed again. Many investors make significant changes to their investment strategies on a regular basis. The best plan is of little value unless it is followed. Failure to consistently implement an investment plan is one of the principle reasons for underperformance.
Many individual investors are busy chasing past performance and succumb to market timing. They are bombarded with hot stock tips from family, friends and colleagues – not to mention the popular press. The value of a financial advisor is not in beating the indexes but in providing a “voice of reason” to clients. Over the last 19 years, one of the most valuable things I have done for clients is to talk them out of actions that would have been hazardous to their future. When the stock market was hitting bottom in November and again in March, there were clients who wanted to liquidate all of their equities and get out of the market. My obligation as a financial advisor is to help clients to see why acting on their impulses may not be in their best interest. The value that a good financial advisor brings to the table is not just the knowledge that he has accumulated, but the emotional discipline to execute faithfully and stay the course through turbulent times.
An Unbiased View?
Published Monday, March 09, 2009
One of the comments on last week's blog post asked where I turn to get my information regarding the financial markets. I think that this is an important question for all of us to look at. Who do we turn to for an unbiased or objective view of what is going on in the financial markets?
It is important to realize that newspapers, TV programs, and magazines have one overriding aim. Their aim is to sell advertising. They want to increase their circulation or viewership,not to give you unbiased information regarding what is ocurring in the financial markets. Crisis sells. It keeps viewers tuned into CNBC.
Take a look at where you go to get an objective point of view.
Some of the resources I rely on are Advisor Intelligence at http://www.advisorintelligence.com/. We rely on their research and model portfolios. I also rely on Dimensional Funds a http://www.dfaus.com/. Dimensional funds has a section for individual investors where you can go for information. I also rely on my friend and colleague, Bert Whitehead, the founder of Cambridge Advisors. He has a blog that you can access at http://www.bertwhitehead.com/under Bert's Blog. I encourage you to check out these resources and feel free to add any under comments that you have found useful. Please be aware that any comments you post are available for all to see.
Welcome to My Blog
Published Monday, March 02, 2009
I am excited about the opportunity to share my thoughts and feelings regarding personal finances in the weeks and months ahead and invite your comments. These are challenging times financially right now as we are all aware. I think it is important not to get carried away by "collapse of the financial system" senarios and overreact based on our fear. It's been said that our financial system is driven by two emotions - fear and greed - and right now, most investors are being driven by fear. This creates opportunities for those of us who do not overreact.
It is important to maintain a diversifed portfolio and to revisit how much risk each of us is comfortable with. We generally believe that you ought to have 1/3 of your assets in real estate, 1/3 in interest earning instruments and 1/3 in equities. We will also look for what we call "fat pitches" for our clients. These are asset classes that we feel are undervalued. One such area is high-yield bonds. We have moved some of our equity allocation to this asset class. Yes, there is credit risk here, yet we believe that this has already been priced in. High yield bond funds were one of the few asset classes in positive territory for January and February.
Overall, I think that it is important not to go it alone. That's why we are here. So that you have someone to guide you through the rough times holding your goals and vision for you.
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