Unhappy With Your Portfolio Returns? Here’s What You Need to Do to Turn Things Around.

July 7, 2008

In the 18+ years I’ve been involved in finance, I’ve seen a common thread among investors during bear markets that is extremely detrimental to their financial future. The syndrome I’ve seen afflict many investors is similar to the psychological state that University of Pennsylvania world-renowned psychology professor Dr. Martin Seligman coined “learned helplessness.” This condition is more pronounced in investors that have had their money managed by a large commercial investment firm for many years but often afflicts those that self-direct their investment portfolios as well.

Whenever I’ve spoken to investors that have their portfolios managed by large investment firms after a period such as the past 12 months when many investors world wide have lost 20%, 30% or even 40% of their portfolio value and ask them what they are doing to repair the damage, more often than not, they have replied, “Nothing.” When I have asked them why they would do nothing when they have lost significant portions of their wealth, they always state that their advisors inform them that long-term markets always rise higher, so if they just hold on, they should recoup all their losses over the next several years. In many facets, this response is very similar to the condition of “learned helplessness”. Investors believe that the commercial investment firms are the experts, that they should listen and blindly follow them, and that they don’t have a choice in this matter because they often tell themselves, “I know nothing about investing.” In today’s investment environment, not only is this viewpoint very dangerous, but also one that is misinformed. An investor that knows very little about investing still has many proactive steps that he or she can take to protect his or her portfolio in today’s dangerous investing environment. Only a select number of asset classes are likely to yield strong returns over the next few years and if an investor is not positioned in these asset classes, he or she is likely to lose even more wealth, and perhaps dramatic amounts of wealth over the next several years.

Investment firms have bombarded investors over the last half a century with messages of authority, confidence and trust, but if your investment firm has created losses for you comparable to the major indexes in your country, you need to take a pro-active approach today to determining if you are invested in the proper asset classes. Sitting back and letting your advisor guide your portfolio without questioning and understanding his or her investment strategy is a huge mistake in today’s investment environment. In this article, I suggested that everyone that employs a financial advisor ask him or her what is the inflation rate in your country, but only after determining the answer for yourself independently of any officially government reported statistic. If your advisor returns the standard, government issued statistic that does not reflect true rates of inflation in your country, you must know that such an ill-informed advisor will seriously jeopardize your financial health.

Secondly in such an investment environment, obviously diversification will not serve you well as only certain country’s economies and certain asset classes are poised to weather this storm well. Discuss a strategy of concentration with your advisor and ensure that you understand why your advisor is choosing to concentrate your portfolio in certain countries and asset classes. If you don’t understand, ask enough questions as necessary to understand why. It’s up to you to understand why and not up to your financial advisor to adequately explain this to you. A recent study by Morningstar regarding the ownership of 500 Morningstar funds revealed the following eye-popping statistics: In 46% of U.S. stock funds, in 60% of non-U.S. funds, in about 67% of taxable bond funds, and in 78% muni bond funds, managers of these funds had not invested a single penny of their own money in the funds that they manage. That’s a serious lack of confidence in the funds they manage.

So the next time you believe that it’s your financial advisor’s job to ensure that your horrible portfolio performance will turn around and that it’s your financial advisor’s job to ensure your future financial security, think again. The responsibility for this job lies squarely on your shoulders, nobody else is going to seize this responsibility for you, and nobody will ever care about the performance of your portfolio more than you will. And you can take that to the bank.
[tags]how to survive in a bear market[/tags]

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