The investment management business is unpredictable. Investment results are wildly unpredictable from one year to the next. Every day’s activity in the markets is unknowable the morning of or the night before. Each month’s returns across asset classes is an exercise in randomness.
Even if you get the destination of an investment’s value right in the end, the path that investment takes to get there could be long or short, straightforward or winding, difficult or steady, volatile or smooth.
Some people look at this and say, “No, I got it, I know what’s going to happen,” and they arrange their assets accordingly. Others throw up their hands in futility and say it’s too hard a game to play, opting instead not to invest at all. But a third group, we’ll call them rational investors, chooses a portfolio approach that doesn’t require being able to predict the unpredictable. This involves rules, diversification and contingency plans. It also requires reasonable expectations and patience and a certain degree of day to day apathy.
The professional, accredited, serious financial advisor can only really help this third group over the long term. I hate to say it but that’s just the reality from what I’ve witnessed over twenty years, in every sort of market environment you could think of. This won’t stop advisors from trying to serve the rest, of course, because when people ask for help, business is business.
An advisor’s best answer to the inherent unpredictability of markets is to introduce elements of the predictable into the equation:
* Here is a financial plan that allows for various outcomes based on what the public markets do going forward. Scenarios A, B and C. You’ll be fine in either case and we’ll make adjustments based on what ends up happening, not based on what we predict will happen.
* Here is an investment policy statement that will serve as our North Star in making all future investment decisions. Every question will be answered by referring back to it: Here is what you said this money is meant to accomplish, these are the items you said were your priorities – does investing in ____ help us satisfy that or is it a distraction or a needless risk?
* Here is a calendar of all the times we’re going to be touching base throughout the year. There’s no mystery about when I’m going to call you with a portfolio update, there’s no guessing about when we’re going to go over the plan and see if there are revisions to make based upon what’s happening in your life. Here’s when you’re going to hear from the investment committee, either in writing or on a conference call. This is a rough idea of when you should expect to see trading or rebalancing activity and here’s an explanation of what might cause that to happen.
* Here is some context about how the investment markets work, why some outcomes are more likely than others, how risk is appropriately balanced so as to optimize – to the extent such a thing is even possible – your portfolio to accomplish the goals laid out in your financial plan. Here are the blogs where you’ll find daily insights and information, with an eye toward demystifying some of the uncertainties of investing. Here’s some occasional debunking of the latest bout of market hysteria using evidence and historical precedent. Here’s a dose of humility about how hard this stuff can be. Here’s some inspiration so as to not lose faith in the process at the most critical moments.
* Here’s a fee schedule, laid out in black and white, so that there is never any question about your true investment costs. Here’s a preparatory meeting about your tax situation to ensure the optimal arrangement and location of your assets. Here’s a program that rewards you for fidelity to your plan and portfolio, lowering your fees over time and celebrating your mastery over the psychological challenges of it all.
* Here’s a personal relationship with someone who is both aligned with your interests and personally invested in your success as an investor. Here’s a phone number you can dial any time. Here’s an email address, never hesitate to ask any question that’s nagging at you. Here’s a web portal through which you can access information about your holdings and run performance reports any time of day, seven days a week, without restriction, forever. Here’s the living, breathing document that is your financial plan, displayed online for you and ready for any tweaks and changes that might be necessary.
* Here’s who you talk to for tax documents, for required minimum distributions, for ongoing retirement account contributions, for changes of address or the transferring of assets, for bank wires and new account registrations or anything else of an administrative nature that might come up.
Introducing these elements of the predictable into what is otherwise an unpredictable world gives the investor a higher probability of success than what they’d otherwise be able to achieve on their own. There will always be answers that nobody has. But not every aspect of investing needs to be unanswerable.