Stock Market

[lookout123]

Well, it has been several days since I last asked our sweet DLM to provide some support for his emotional meltdown and views on investments, investors, and advisors. Unless the muppet has started a new forum and posted the answer there, I'll just have to accept the fact that he has failed to borrow a cup of integrity from his neighbor so DLM is still unable to post a reply.

I should just let this die but for several years the muppet has made the same claims but has refused to respond to any questions or provide support. I already wrote a little about the misdirection that DLM uses when claiming that "funds underperform the market". No response. I will now very briefly address his claim that it is well known that financial advisors underperform the market by 1%. It's quite simple.

DLM has yet to provide any support for his claim so I can't be 100% certain that I'm addressing his actual concern, but I will try.

Unless muppet boy has a super secret chart showing the performance of every advisor's recommendations I'm not sure where he is getting his number. The significance of 1% is fairly simple to grasp though. 1% is a typical (but not universal) fee applied to assets under an advisor's care in a fee based program. So a client who has $100,000 with an advisor would pay $1000 during a 12 month period regardless of the number of trades or performance. (commission is the other prominent option. each has an appropriate client type).
To say that advisors underperform by 1% would be true if an advisor accepted a client's money under management, charged a 1% management fee and simply threw them into an index fund with no further service or activity. So there you go. Market performance - 1% equals "advisors underperform the market by 1%.

The problem is that this scenario is based on the idea that an advisor puts the money to work in an index, doesn't look at it anymore, and provides no other service for a client. This is a complete misunderstanding of a financial advisor's role at a very basic level. DLM wants to reduce investing to simple mathematics. In his mind it is all about the investment. He fails to understand that the investment is only a very small part of the puzzle. The central component of any investment plan is... *drum roll* THE CLIENT! Seems pretty logical, huh?

Now consider this; "the market" has averaged better than 11% annually over the last 20+ years. But during the same time frame, average INVESTOR returns hovered around 3%. That is horrifying. Why is that? Here is an idea. Investors are people. Left unchecked they follow the herd. They make their decisions based on feelings and comfort. That tendency applied to investing can be devastating. That is why people buy high and sell low. They wait until the market is running up before they find the confidence to throw their money in, but then they get scared when their account values are down and they sell. The time frame we are talking about directly correlates with the rise of the individual investor, and the DIY approach. Before the '80's the average american worked for a pension and had cd's and maybe a few other small positions. Wealthy (er) individuals invested in the market with the assistance of advisors unless they had the necessary skillset to do it themselves. As pensions were eliminated and 401 (k)s and IRA's became the retirement vehicles of choice the Suze Orman's and Dave Ramsey's came to the forefront. They gave (generally) accurate information about the ease of investing and they stressed that you don't need to pay an advisor. Never mind that you are paying them for the books and seminars to teach you how to do this. Or that Suze is a failed Merrill Lynch broker who doesn't even invest in the stock market because she doesn't understand it. (I'll try to dig that interview up.) They are right, you can get the exact same performance (sometimes better) as an advisor if you have the skillset and discipline.

Anyone can make money in the market. Buy an index and enjoy the ride. Buy individual stocks in a diversified manner and monitor them and enjoy your increases. At least that holds true in an upmarket. But, uh oh... the market goes flat or down one out of four years. That is when a good advisor really earns his/her keep. Asset protection is the key to a successful financial plan. A properly enforced buy/sell discipline is an absolute must.

Who is going to hold the DIYers hand through market volatility? Who is going to reassure the investor about the quality of their investments on days the market drops 2-3% before lunch time? Who is going to enforce a rebalancing plan if a sector outperforms? Who is going to establish, maintain, and implement an estate or wealth transfer plan? Who is going to develop an asset protection plan? Who will research, propose, and implement plans for college, retirement, disability, long term care, life insurance, trust construction and maintenance, multiple generation planning, etc.?

DLM lives in a world of theory where truth is a simple set of equations. I, and most of you, operate in the real world. Investments, like our DLM, are just tools. It is the INVESTOR that matters. It is INVESTOR BEHAVIOR that dictates success or failure in financial planning. A good advisor spends relatively little time managing investments, the bulk of their time is spent managing behavior.

Investor behavior can only be managed if proper expectations are established and maintained. This can only happen if the advisor really understands the client's goals, risk tolerance, and time frame. By doing those things the advisor and client establish a plan. Here is the kicker - sometimes the performance expectation that is established is below market averages because a client's goals and risk tolerance should dictate the types of investments held. If a client can expect an average return of 8.5% annually (net of expense) and be reasonably assured of never losing more than 5% in any given year do you really think they care if their neighbor earned 10% that year? Nope. Their goals, their plan, their tolerance.

A trusted advisor's goal is to help a client achieve their goals, not to beat a benchmark.

So, here you go TWat. I've asked you for a couple of years to support your claims. I've offered to put your recommendations against mine. You have never had the integrity to do anything but splutter and spit "george jr...mental midget...shiny shoe salesman...smoking gun" Well here is your chance big boy. Roll up your sleeves, wipe the spittle from your chin and actually step up. Discuss the realities of the situation or shut up. If you can't step in here and refute something I've posted I don't ever want to see your simpleton attempts at discussing investing again. You have no credibility in this arena as you have failed to demonstrate even a sliver of integrity. So put that in your pipe and smoke it Dearest Little Muppet.

But try to leave your emotional responses at home. We are adults here, after all.