Broker Check

4 Lessons For Retail Investors

| June 18, 2015
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How do people improve in their personal lives and at work?  They learn from their mistakes.  How about investors?  Sadly, very few investors truly learn from past mistakes to increase their future chances of success.  In this post I’d like to suggest four lessons that if understood and accepted by retail investors, could mean the difference between achieving their long term goals and not.  Day in and day out, I meet with clients and prospective clients, and if I had to summarize their number one issue (my diagnosis not theirs) it’s that they’re getting in their own way and repeat mistakes from the past. The list below is by no means exhaustive, but it does address some common issues that I see time and time again in my business.

Lesson # 1:  Don’t mistake brains for a bull market

I learned this expression about brains and bull markets early on in my career.  I started in this business right at the tail end of the tech bubble. The current market environment (S&P 500 Index shooting the lights out year after year) and emerging investment business landscape (discount brokers offering a myriad of trading ‘tools’, robo advisors, etc.) have many retail investors questioning the value of professional money managers.  If all you have to do is buy a stake in a passively managed stock portfolio that goes up every year, who needs an advisor or portfolio manager?  My feedback?  That strategy can work wonderfully for a period of time…………..until it doesn’t. Ever heard the expression about not knowing who’s wearing a bathing suit until they drain the pool?  With regards to your portfolio (and otherwise I suppose), are you wearing a bathing suit?  Are you truly diversified?  Do you even know what ‘truly diversified’ even means?  Maybe you are and maybe you do, nevertheless, these are legitimate questions that investors should be asking themselves.   The point being, there are a whole lot of investors out there who have taken one too many trips to the S&P 500 index punch bowl over the past 5 years and that index’s performance has nothing to do with their individual investing prowess and has everything to do with macroeconomics and Federal Reserve policy.


Lesson # 2:  Don’t mistake your friends/co-workers/relatives for Warren Buffet

In an informal poll within our office we have been surprised to learn that a number of our clients’ friends, family members, and co-workers are software engineers, plumbers, and teachers by day and maven stock pickers and portfolio managers by night.  Who knew???!!  Step aside Warren Buffet and Carl Icahn, you are unnecessary evils.  Forget about it Fidelity Investments, you can keep your million dollar portfolio manager salaries and bonuses because these people aren’t interested in working for you.  To the members of this sub-culture, it’s not about the money or the fame, it’s about the process, and being able to rub their investment successes in their friends’ and co-workers’ faces.  Apparently, “everyone” that some of our clients know is “beating the market and getting amazing returns” with their portfolios.  How does hearing this make our clients feel?  Like morons for having diversified, risk-managed portfolios.  I’ve been at my trade long enough to know that these tales of outlier performance are unlikely to be true.  What’s more likely is that these clients’ friends are telling only part of the story, the part where they are experiencing success.  Investors who “blab” about their investments typically only mention successes and never their failures.  Don’t buy it, or it could cost you dearly.  Of course, the other side of this coin reared its ugly head circa 2008-2009 when so many of our clients’ friends, and especially annoying co-workers, apparently ‘got out right before the market crashed’.  Sorry, but I’m going to need a baloney check on aisle 3.  Assuming that you have a properly diversified portfolio (see below) and a sound investment strategy, please do yourself a favor and stick to it. The stock chart always appears greener on your neighbor’s/co-worker’s computer screen.


Core Value # 3:  Only dramatic fundamental change from your pre-financial crisis portfolio will prevent you from having your head handed to you the next time that the market drops precipitously.

They say that the definition of insanity is repeating the same process over and over and expecting a different result.  As an exercise, take a look at any of your investment statements from June of 2008 and take inventory of what you owned and how you owned it.  Chances are that a current inventory would yield similar results.  Please note: ‘fundamental change’ does not mean that you were a client at Merrill Lynch and now you’re with Morgan Stanley.  It also doesn’t mean that you previously owned Fidelity investments and now you own investments from Vanguard.  Those changes are merely cosmetic and simply mean you’re eating the same candy bar with a different wrapper.  Fundamental change means, for example, running some linear regressions with your current portfolio assets to determine your level of diversification and being satisfied with the results.  How about shocking your current portfolio assets to see exactly how they could have held up during ’08 and ’09?  If these suggestions sound totally foreign to you, find someone who can perform these processes and educate you about their meaning.  Failing to do so will likely put you on the super highway to unnecessary portfolio pain and stress.  Don’t say you weren’t warned.


Core Value #4:  God didn’t give you two sides of your mouth so that you could talk out of both of them at the same time (whether to another person or yourself).

Ever heard the expression ‘God gave you two ears and one mouth for a reason’?  It’s true, we should all try to listen more and talk less. Well, he didn’t give your mouth two sides so that you could in one sentence ask a portfolio manager why you’re not beating the market and in the next sentence ask for confirmation that you won’t lose anything if the market corrects.  How about telling that same portfolio manager how you and your friends are building a bunker in preparation for the impending end of-the-world and then immediately question why your portfolio holds assets that have a negative correlation (behave differently than) to the stock market.  As a suggestion, when the barbarians storm the bunker, consider throwing your gold bullion at them as a weapon.  Just remember, don’t throw your bullion until you see the whites of their eyes.  Talking out of both sides of your mouth (investment-wise at least) is symptomatic of a lack of financial education (at best) or a lack of reasonableness (at worst).  As such, double-talking is counterproductive as it can only end in unjustified dissatisfaction on the part of an investor.  Double-talking causes investors to chase outcomes that literally do not exist.  Just because you say or think that an outcome or expectation is reasonable does not make it so. 

By: Andrew Gonski

There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.

Stock investing involves risk including loss of principal. No strategy assures success or protects against loss.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.  LPL Tracking #:

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