Rational Advisor

Sometimes it’s real difficult to get the investor to do the right thing. So many times, they want to buy when it’s hot and sell when it’s most inappropriate. They forget about their financial plans, and instead invest in a market plan. They forget about the downside risk, until it’s too late.

Just because an investor is hell-bent on driving his financial car over a cliff, does not mean that I have to provide him with a tank of gasoline on the grounds that if I don’t someone else will.

A lot of times these investors don’t see the cliffs. But as a seasoned advisor, who has done a lot of investment planning, we do. We’ve seen this same situation countless number of times, with many different investors.

If someone else wants to give these investors the tank of gasoline (call it resources, emerging markets, india, China, Junk Bonds, ABCPs etc), let the blood be on their hands. I still have my integrity and professonalism. Compromising these because “the devil made me do it” is neither an option nor an alibi.

Nothing and no one can make me do the wrong thing.

When I look at investments, the first thing I concentrate is on the downside, and making sure that investors understand what is the worst possible outcome in any 12 month period (typically it could be as much as 11%), and then look towards all the various ways we reduce the different risks and obtain a return that fulfills a financial objective - NOT a return that beats some index. Remember the indexes have a lot of negatives and risks that most people do not see - Don’t forget the post 2000 performance of the indices. How do we reduce risk:

Reducing the Risk of Equities - by including Fixed Income
Reducing the Risk of Investment styles - by including both growth and value
Reducing the Risk of Geographic regions - by including North America and International markets evenly
Reducing the Risk of Capitalization - including both Large Caps and Small Caps
Reducing the Risk of Investment managers - including only external investment managers carefully selected for their risk management skills.
Reducing the Risk of markets changing the allocations - Rebalancing the portfolio.
Reducing the Risk of an advisors/emotions changing the structure - have an outside firm monitor, rebalance, audit, and manage the process.
Reducing the Risk of not receiving income - By including Both Bonds and Dividends

Yes, it is all about reducing the risks, and then letting the returns manage themselves.

Remember, nobody can make you do the wrong thing.

As William Penn (founder of Pennsylvania) said “Right is right, even if everyone is against it, and wrong is wrong, even if everyone is for it.

R

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