"Yes!" Who doesn't love that word? Much nicer than its black sheep brother, "No!" Yet sometimes yes may be the response you want but isn't the answer you need. Take the financial advisory industry. If you work with a financial adviser, you don't have the time and/or expertise to deal with financial markets. You need a pro! Yet some advisers don't appreciate this, instead blindly catering to an investor's every whim. They're advisers in name, but yes men in practice. Their "advice" can be a significant roadblock to achieving your long-term goals.
How so? Pretend it's March 2000. You're calling your adviser, Jim, because you're tired of being in broad US mutual funds. Tech is where it's at!
You: "Hey Jim! I just saw the NASDAQ's up 41% since last November.i I'm missing out!"
Jim: "Hi (you)! Yah, Tech's had a heckuva run, that's for sure!"
You: "I know! How can I get in this thing? I'm missing out on all these Internet companies!"
Jim: "Let's swap that Large Cap Stock mutual fund and put it all in NASDAQ 100 firms. I have some hot stocks for you, too. Any cash on the sidelines we can put to work?"
You: "But is the NASDAQ 100 the Internet? I want the new economy. A new industrial revolution is underway and it's all about the clicks, Jim."
Jim: "You're right. Clicks, not cash. How about this pure-play dot com mutual fund? Went up like 150% last year?"
You: "Now you're talking."
Jim: "And we could add in individual stocks. Diversification, you know. Global Crossing is hot-they're building that undersea fiber optic line that'll carry those clicks transatlantic. It's not Internet itself, but I think you can see the tie in."
Back in 2000, many investors chased heat, and Tech was the hottest thing around. The problem is, what's blazing now won't necessarily stay warm-past performance doesn't dictate future returns. If Jim wasn't caught up in the heat and wasn't incented to seek trades, maybe he'd tell you extrapolating past gains into the future is folly, and making investment decisions on that alone can lead you far astray from your financial goals. Plus, a well-constructed portfolio is diversified-sector leadership rotates, and concentrating on a hot one means trouble when it turns cold. A competent adviser should call out these behavioral errors and stress the importance of remaining disciplined.
Now let's flip the hypothetical 180 degrees. March 2009-the violent throes at the depths of the last bear market.
*RING RING, RING RING*
(10 rings later, Jim picks up.)
You: "Jim! Where have you been? I need out! I just can't take it anymore-I've got to stop the bleeding. The whole system is broken. The market's going to zero. Move everything to cash. I just can't risk it. This money is for my family. I can't lose any more. My decision is made and final."
Jim: "To be clear: You want to sell everything, as soon as possible, at the market? You got it-I'll have it liquidated STAT."
Bear markets can be quite painful-especially one with as steep a drop as October 2007 - March 2009. But stocks' long-term return of roughly 10% includes bear markets.ii If you can correctly forecast a bear, getting out may make sense. But if not-and in the unfortunate event you're in the market when one happens-the key is to remain disciplined. The way most folks fail is bailing near the depths of the bear, thinking the plunge is far from over.
In our hypothetical conversation, Jim should try to settle you down. Perhaps if he thought of your goals in his plan (and in my view, he should have), Jim would remind you the strategy you have is designed specifically to reach your financial goals. Maybe he'll note that making an emotional decision in the violent gyrations of a bear market can damage your financial health. Most investors at points like this are scared, confused, emotional wrecks. The easy path is often for your adviser to follow your emotional lead, but the harder road is often the right one. After all, you have long-term goals to reach, and if you're seeking growth, cash flow or some combination of the two, cash alone typically won't cut it. Discipline is essential in investing.
When it comes to your future financial well-being, a yes man can be comforting, but a huge threat-a financial wolf in sheep's clothing. Markets are volatile, both up and down-and that volatility is the price tag of stocks' long-term returns. But that doesn't make negative volatility any easier to deal with, especially in the short term. Day-to-day drops may make you queasy. Declines like corrections may cause you to question why you're in the market. All perfectly normal reactions!
But the key is what you do after that reaction. When markets get frothy with greed or frosty with fear, you might just need a little help, which is where an adviser comes in. A "yes man" undermines this discipline. Instead of being the voice above the fray, a yes man enables your fear or greed by reinforcing what you think or feel at a certain time. Fact: Sometimes the best advice is advice you don't want to hear.
i FactSet, as of 3/4/2014. Nasdaq Composite Price Index Return from 11/30/1999-02/29/2000.
ii Global Financial Data, as of 2/14/2014.
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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.