I’ll be your savior, steadfast and true. I’ll come to your emotional rescue.—The Rolling Stones
I’m pretty sure that Mick Jagger attended the London School of Economics at some point. I’m pretty sure that Keith Richards was otherwise occupied. But their lyrics shed light on a big part of what a financial advisor is asked to do. Besides figuring out what strategies actually work in the market over time-we happen to favor strategies that adapt-it’s important to keep clients on an even keel. DALBAR data makes it clear that intestinal fortitude is just as important as investment acumen.
Warren Buffett, in the preface of Ben Graham’s The Intelligent Investor, writes, “To invest successfully over a lifetime does not require a stratospheric IQ, unusual business insights, or inside information. What’s needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding that framework.”
I added the boldface type to emphasize the point, which is all too often completely lost on investors. They place money into a strategy, presumably one that they believe has the opportunity to perform well over time, and then yank money out willy-nilly every time they get uncomfortable. In the market, sad to say, you get uncomfortable a lot. It’s a perfect example of emotions corroding an otherwise good decision framework.
We think our systematic relative strength process is a good way to make sure emotions don’t corrode our decision framework, but we still spend time with clients to keep them on an even keel. I admit that my emotional wiring should probably come with a warning label, but after 25 years I find it hard to get too worked up about the ups and downs of the markets. Clients, naturally, respond a bit differently! It’s important to be able to reframe things for them, to broaden their perspective, and to help them cope with their nervousness. Distraction is good too. (I’m not joking about this-the psychological literature is pretty clear on this point. I tell clients to read the sports pages and let us lose sleep over the market.)
Relationships and trust often matter more than what is bought or sold. A good decision framework is only half the battle. When you look at investor results over time, it’s quite possible that financial advisors can add more performance through good emotional support than through good investment selection.
