Bad Actors

May 08, 2018 | Sam Rook


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The People That Ruin Your Portfolio

                Managing a family’s hard earned savings and protecting their future is a rewarding and exciting career. I work hard for my clients to help them plan and prepare for the big things in life; both good and bad. It’s not easy because no one prepares you for the emotional side of the business; both good and bad. I like waking up every day and having no idea where my day will go from there (well besides to the GO train- but we’ll skip that story).

 

                One of the most difficult parts of my role is handling the negative events in a client’s life. I am not talking about death but rather things like illness or disability or loss of a job. These are the life events that can really lead to financial hardship. I am also cognizant that any preparation we do together can quickly go out the window for the unexpected parts of life that always pop up.

 

                Of course as the grand survivors of evolution, our species was obviously good at avoiding the bad parts as much as possible. What eons of evolution has done is hard-wire our brains to be afraid of bad things. The “Fight or Flight” reaction always hit me as a child when I would go into a dark room with the power out. Maybe I watched “Halloween” too much. Fight or Flight is so hardened in our OS that we translate that reaction into other stressors in our life.

 

                Let’s take market volatility. I have discussed this enough in earlier posts but let’s remember that volatility is NOT risk. Volatility is one of the keys to equity outperformance over long periods of time. It is, however, a feature we tend not to like too much. That sinking feeling when you log on to your portfolio and see the words “market” and “correction” is the same feeling I got walking into my basement in the dark. UH OH. Something is going to kill me!

 

                Now it isn’t the dark or the market volatility that will kill you. [Narrator: Michael Myers begs to differ] It is how you respond to this negative stress that will actually kill you. In the case of market volatility, Dalbar out of the United States publishes an annual report showing “Investor Returns” (that’s you, dear reader) vs “market returns”. Here is how that has looked:

 

Source: https://seekingalpha.com/article/4108688-investor-returns-vs-market-returns-failure-endures

 

                Investor returns have been below S&P500 returns in all measured time frames. This is what should have you running scared. You commit to a plan, stick with your portfolio when it is going up and the first sign of bad news you scurry back to the safety of cash/upstairs and vow never to go back into stocks/the basement again. Usually the scurry part doesn’t happen until after it’s too late.

 

                Except that is not definitely not working for you, dear reader. I learned long ago that there is no Michael Myers hiding in my basement. Investors should learn that he also is not lurking in your portfolios ready to make you scream like Jamie Lee Curtis at the first sign of a market correction. Remember, volatility is how you get outsized returns in equities vs fixed income.

 

                The secret is not to ignore your fear, nor is it to toss caution to the wind and let it ride. Each person has their unique tolerance for bad Hollywood horror movies so it becomes a matter of finding the right amount of volatility to help you meet your long term goals and protecting yourself and your family. Having a proper asset allocation that fits your fight or flight response will help you avoid being part of the group that vastly underperforms. Remember in any horror movie, it’s always the actor that panics that meets their demise first.

 

                Don’t be that bad actor.

 

 

                If you want to chat about building a plan for you and your family, contact me today.

 

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