My pal James Osborne, a Colorado-based RIA at Bason Asset Management, talks about client expectations on his blog this week. Nothing can ruin a relationship between an advisor and their client like a surprise – especially an investment-related surprise…
And then there is a second conversation about expectations, one that is likely more important than how often clients will receive portfolio reports and emails from me. It’s what we can expect from the markets. Nothing can wreck a reasonable investment philosophy quicker than saying “I didn’t know this could happen.” If you’re a long-term buy and hold investor who is surprised that the market can fall 30% or more, you’re in trouble. If you’re a trend follower who is surprised that you can get whipsawed by a moving average, you’re in trouble. If you’re a value investor who is surprised that your stocks can get cheaper still, you’re in trouble. If you like CDs and you’re surprised that they will lose purchasing power and you’ll pay a third of your returns to the IRS, you’re in trouble. Surprises are bad. Really bad. It means we planned poorly and maybe we don’t know what to do next.
James manages a passive asset allocation strategy. During new client on-boarding and, I suspect, repeatedly afterward, he must go to great lengths to explain to clients what this means and what it doesn’t in bull and bear markets. Read the whole thing below, it’s a very important concept.