A podcast listener asks:
My financial advisor has half of my portfolio in cash, bonds and hedge funds that haven’t moved in years. Waiting for the dip. I know you two can speak of this. Any thoughts?
Here’s the short answer from last week’s Animal Spirits:
Now for the longer answer.
Investing would be much easier if there was a single agreed-upon way to allocate your money successfully. But there’s not. There are a number of different routes people can take to build or preserve their wealth.
My wealth management firm manages money one way. There are thousands of other firms that have their own way of doing things. And that’s fine.
Markets themselves are made up of different actors who all have their own views of the world, each with their own opinions, investment process and philosophy about how to construct a portfolio. So much of any investor’s allocation decisions comes down to their personality and comfort with any specific strategy.
The greatest investment strategy in the world is indistinguishable from a failed investment strategy if you don’t have the ability to follow it come hell or high water.
This is why communication, ongoing planning and education are such important components of client success for any wealth management firm.
The advisor in question here could have legitimate reasons for holding cash, bonds and even (gulp) hedge funds in this client’s portfolio. But those reasons need to be spelled out in advance. Waiting to “buy the dip” is not an investment plan, it’s a tactic. And tactics are useless if not paired with a comprehensive financial plan.
One of the difficult aspects of the client-advisor relationship is no one is going to hold your hand through the process to ensure the wealth management firm you select is making good decisions on your behalf. That’s totally up to you and the advisor.
Here are some of the most important things you need to understand as a client of a wealth management firm:
- What do I own and why do I own it?
- What types of investments won’t be placed in my portfolio and why?
- How does this portfolio and investment plan mesh with my personal risk profile and time horizon?
- Does my portfolio take into account my goals, desires, risk tolerance and financial circumstances?
- Has my advisor done a good job getting to know my willingness, ability and need to take risk?
- Do I understand my advisor’s core investment beliefs and how they apply to my situation?
- Does my advisor have a process in place to make good decisions on my behalf on a regular basis?
You see, there is a big difference between managing money for a client and managing money for the market. Yes, the markets matter in this equation but they certainly shouldn’t drive every decision in the plan.
There is a big difference between a collection of securities or funds in your portfolio and an actual investment plan.
There is a big difference between financial advice that sounds good in theory and financial advice that works in practice.
There is a big difference between short-term tactics and a long-term process.
There is a big difference between trying to outsmart the financial markets and trying to reach your financial goals.
There is a big difference between ‘What is the best investment strategy?’ and ‘What is the right investment strategy for me?’
And there is a big difference between managing money and managing investors.
Behavior economist Meir Statman once wrote, “Financial advisors frame themselves as investment managers, providers of ‘beat-the-market’ pills, when, in truth, they are mostly managers of investors.”
Before investing any money on your behalf, a good financial advisor will take the time to explain their process and understand your circumstances.
Asset management without goals is like trying to build a house without the blueprints.
It doesn’t work.
Investment Management vs. Financial Advice
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