Tuesday, 25 of September of 2018

The Grand Illusion

But don’t be fooled by the radio

The TV or the magazines

They show you photographs of how your life should be

But they’re just someone else’s fantasy

So if you think your life is complete confusion

Because you never win the game

Just remember that it’s a Grand illusion

And deep inside we’re all the same.

We’re all the same…


Styx – The Grand Illusion



The air was abuzz at the BISA Annual Conference after James Bowen’s presentation “An Optimistic Perspective”.  His positive outlook seemed to lift a heavy burden from shoulders tired of worrying about the future of America, her economy and the markets.

Several attendees commented on the encouraging prognosis, with smiles broadening as they recounted highlights from the First Trust CEO’s talk.

One such comment, however, really stuck with me.  An old colleague simply stated, “I don’t know about you, but my portfolio certainly isn’t up 100%”.  “Mine either”, I replied, adding “I guess I wasn’t smart enough to replace all my Citi with Apple and, even so everything I put into those Lehman bonds is gone forever.”

We both lamented a bit longer, while wondering if there were plenty more suckers walking around thinking the same thing.

The markets have rebounded nicely from their 2009 lows, and perhaps all of the gloom proffered forth by the soothsayers was really uncalled for pessimism creating unneeded turmoil and chaos.  Or was it?

Only time will tell if the negative sentiments of these self-acclaimed prophets will prove out, but closer to home, I am guessing what many investors experienced is more akin to my colleague and I  than a portfolio which doubled in a few short years.

John Bogle, the Founder of the Vanguard Group calls this “The Grand Illusion”.  In his treatise, “The Little Book of Common Sense Investing”, he points out the consistent gap between “investment performance” and “investor performance”, cautioning readers that returns reported by mutual fund companies aren’t actually earned by mutual fund investors.

Warren Buffet put it this way, “It won’t be the economy that will do in investors, it will be investors themselves.”

While the knowledge investors are their own worst enemy is not news, it is worthy of revisiting, as, it is central to almost everything you do for your clients.

Perhaps, we are to blame for setting the game up this way.  Ours is an industry obsessed with performance.  We compare returns against benchmarks and peers.  We use indices and past performance in our client presentations and reviews.  No matter how hard we try to wrap ourselves in a blanket of service and advice, the conversation inevitably springs-back to investment performance.

And, like it or not, this is what our industry has de facto trained our clients to focus on.  Am I the only one who had clients pulling their accounts in the late 90’s because of those paltry 25 percent returns?

Our performance reporting tools don’t even provide information on how well a client is performing compared to their goals!  And, while you may argue, I completed a plan for my client, how often do you update and adjust those plans based on the client’s progress toward their objective, versus how much time you spend talking about investment returns on a “risk-adjusted” basis?

Yet, in the quiet hours of the night, when left with the demons and worries, and harsh truth’s, investors’ fears revolve much more around whether they can afford Johnny’s tuition payment than whether they beat the indices, peers or their friends.

Even in the face of harsh statistics and admonitions from leading minds such as Messrs. Bogle and Buffet we soldier on, espousing Modern Portfolio Theory and a host of investment philosophies, which seldom reach the root of the problem.

Each year Dalbar publishes “Quantitative Analysis of Investor Behavior” (“QAIB”) where they analyze the difference between investor performance and investment performance.  And, every year since they began publishing the report in 1994, the results are the same – investors continue to be their own worst enemy.

The most recent 20-year Dalbar study compares the returns of an average equity fund investor to the returns of the market from 1991 to 2010.  As you can see, permitting their decisions to be driven by short-term volatility, the average equity fund investor earned returns of only 3.83%, while the S&P 500 returned 9.14%.

And while statistics such as these provide considerable fodder for the raging debate between active and passive management, as well as ammunition for those buy and hold purists, from our perspective it highlights something entirely more intrinsic; i.e., you have to get to know your clients better.

Protecting adults from themselves is a tough job.  It’s a complex game of chess, which requires coupling nerves of steel with high levels of tact and diplomacy.  It requires refereeing between spouses, parents and children and all sorts of messy interpersonal human affairs.  It requires becoming part priest, rabbi, psychotherapist, investment counselor, confidant and friend.

At its very core, it requires that you get much further invested in your clients.  Going beyond understanding their financial vital statistics such as net worth and income, by starting to learn about their relationship with money and the important people in their lives.

Accomplishing this requires a high-level of emotional intelligence, which, when applied might leave you and your clients rocking to an entirely different tune – We Won’t Get Fooled Again!

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