One newsletter reader, who wants to remain anonymous, called a couple of days ago and told me that his wife’s portfolio just lost some 46% dropping from $170k to some $91k in about 1-1/2 years.
Your first reaction might be “how could you let this happen,” but I believe that this is, unfortunately, not an isolated case. Whenever investors engage the services of a broker or an advisor, there is some trust involved by assuming that this person knows what he’s doing.
As the portfolio starts to sink into oblivion, you’ll hear explanations like “it’ll come back up,” “a turn around is about to happen,” or my all time favorite “the market can’t go any lower.” There are a host of other excuses, but you get the picture.
This investor’s portfolio was diversified, which means it was set up based on a buy and hold mentality, irregardless of whether market conditions were bullish or bearish at that moment.
The reader was kind enough to share one main component of his portfolio, which was a fund called RHY. Let’s take a look at a 2-year chart:
This is about as bad of a chart you can find if you’re holding a long position. The reader told me that he got in at $16 and finally out at about $1.30 due to his urging and not his brokers. It’s another sad story of total incompetence and lack of a plan to protect a client’s assets.
This illustrates what I have been writing about for years. When you select someone to manage your portfolio for you, the most important question to ask is “what is your exit strategy?”
If there is no clear answer or stammering and a bunch of excuses as to why he doesn’t use one, look for someone else. Once you find such a person, get it in writing by asking for an Investment Policy Statement (IPS), which should exactly describe the methodology employed to get in and out of the market.
No matter which investment approach you favor, losses are part of investing; keeping them small and manageable is the key to long-term investment success.
Comments 3
That’s great advice about the IPS. Trouble is the same people wreaking havoc on portfolios also will be the drafters of the IPS between themselves and their clients.
Here’s what Investopedia has to say about IPS’s:
A document drafted between a portfolio manager and a client that outlines general rules for the manager.
This statement provides the general investment goals and objectives of a client and describes the strategies that the manager should employ to meet these objectives. Specific information on matters such as asset allocation, risk tolerance, and liquidity requirements would also be included in an IPS.
For example, an individual may have an IPS stating that by the time he or she is 60 years old his or her job will become optional, and his or her investments will annually return $65,000 in today’s dollars given a certain rate of inflation. This would be only one of many points included in an IPS; however, it probably would also include such things as general guidelines outlining what the individual wants to leave behind to loved ones when he or she dies.
As you can see, unless an investor specifically requests it, provisions for exit stratigies don’t seem to be standard fare for this document. Unless you assume that “liquidity requirements” are meant to address the times when an exit strategy would be employed. But this definition isn’t explicit enough to make me feel comfortable that all managers interpret it that way.
Speaking of assuming…I’m assuming most investors have no clue that an IPS exists. When I started my investing life some 10 years ago it was across the desk from an investment advisor and he never whispered a word about it. I fired him about a year and a half in and have been doing my own thing ever since.
G.H.
Thanks for the caveat re:advice of brokers. My experience with brokers (total of four) during bear markets is painfully similar what you outlined in your piece. Since taking over my own buy/sell decisions my losses have decreased substantially…..now I can focus on offsetting inflation and preseving value.
I value your daily efforts….especially the charts and the emotion-free
analyses.
G.H.
You are correct, but at least investors can ask during an interview for an ISP to review if it contains any provisions with regards to an exit strategy.
If none exists, you can demonstrate that you have an exit strategy by simply getting up and leaving. 🙂
Ulli…