I believe the above stampede was engineered by a few hyenas
at the behest of Scar in an attempt to kill the king, Mufasa, and his son,
Simba. While the Lion King certainly is
not a film about investing, I do think the stampede scene illustrates what I
believe to be a fundamental truth about investing – fear leads many to run for
the exits all at once. This undoubtedly
is a horrible strategy, and the herd is guilty of buying at the top and selling
at the bottom.
The way to avoid this is to build a diversified portfolio,
dollar cost average into riskier assets (i.e. spread your purchases over time),
and only look at it on occasion. Almost
everyone can do one and two, but the problem lies with #3. Almost nobody can put their money aside and
not look at it. And if you can’t,
chances are you will worry about it from time to time.
Certainly there is nothing wrong with worrying about your
money. In fact I believe worrying, if
properly directed, leads to prudent asset management causing the investor to
focus on risk as the primary driver of asset allocation. However, when worry turns to fear and panic,
it leads to catastrophe.
We recently met with a very large investment management
company, who wanted to pitch us on their investment process. It had a lot of merit: essentially they skew
their investments to assets that have historically outperformed the
market. The issue is that they expected
(really almost require) us to hold their investments through up markets and down
markets, regardless whether we felt it was prudent for our client to liquidate
given their risk level.
They use a lot of data and numbers to tell their story and
wanted us to “teach” our clients how to invest – buy and hold these asset
classes until the end of time. My issue
isn’t with their style or their numbers, but they fail to realize an essential
fact: when markets are in their darkest hours many investors aren’t built to
handle that pain and need to abandon ship, which typically happens to be at the
worst possible time.
So how can we as wealth managers prevent our clients from
doing this? The best way is to know your
client. This approach will lead to suitable, diverse, portfolio construction,
which should minimize portfolio draw downs. This strategy and discipline should prevent a wholesale
sell off for the very risk averse clients. While we aren’t selling at the
bottom, we are certainly paring back the risk as markets decline, which by the
way is another method to avoid the herd mentality and the risks associated with
it.
The views and opinions expressed herein are those of the
author(s) noted and may or may not represent the views of Capital Analysts,
Inc. or Lincoln Investment. The material presented is provided for
informational purposes only. Nothing contained herein should be construed as a
recommendation to buy or sell any securities. As with all investments, past
performance is no guarantee of future results. No person or system can predict
the market. All investments are subject to risk, including the risk of
principal loss.
