I had an interesting conversation with a man named Jeff Snider last week. He is an asset manager. He and I both pondered the state of our economy and the fact that, despite the fact that the majority of American financial advisors are using computer programs modeled after Nobel prize winning theories, American’s have lost a decade in the stock market. What about all of the arguments for diversification and asset allocation? What about risk reduction? What about modern portfolio theory? What about all the statistical analysis and projections?
All bunk, it seems.
Jeff shared a significant opinion with me: That financial advisers started using these computer modeling systems to lend creedence to their own opinions, when their own expertise and analysis was – perhaps – inadequate. Computer programs based on science (statistics, pretty much an attempt to identify patterns in markets based on historical data) seem more….objective…clever…dispassionate….whatever the reason, the idea took hold. Pretty soon everybody was using some system (in fact, in our industry, it’s often one of the first questions asked of a colleague; “What system do you use?”). But, as we have seen in The Great Recession, all of this modeling didn’t save anybody from the financial rollercoaster ride. (As a matter of fact, I’m still waiting for my car to climb the next big hill of the ride but I’d settle for a curvy small one right now.)
So, where does that leave you as a consumer? I wish I knew. It’s funny, most personal finance matters are very fundamental and basic (isn’t there a quote about common sense not being all that common?) and yet managing your finances in the 21st century (I just got a flashback to Daffy Duck as “Duck Dodgers in the 21st centurrryyyyy”. Sorry.) is anything but basic. And who has the time, let alone inclination, to learn about and understand all the moving parts that represent a financial picture? This is where a financial planner earns her/his stripes, I think.
It’s not about what the computer says, it’s about developing a relationship with someone who can help you foster an awareness of, stewardship over, and peace with your finances. For me, it’s isn’t about what products you buy or not buy. Maybe, just maybe, so many financial advisers have not yet drawn from their well-spring of wisdom to counsel their clients and, instead, rely on a computer to communicate what should happen and why. Hmm…I think someone moved their cheese. Mmmm… I love cheese.
Photos courtesy of ClipArt.
I just wrote an article for my own newsletter about this so called “Lost Decade”. Calling it lost is “bunk” in my opinion. Check out Morningstar’s webpage:
Look at the 10-year returns. Not one of the main fund stock or bond categories (large growth, mid value, intermediate corp, etc…) is negative. The 10-year stock returns are certainly below historic averages, but bond returns are above average. A diversified portfolio, tweaked with regular rebalancing would not look too bad over the last 10 years. Certainly not as bad as the financial press would have you believe.
I do agree with you on the computer modeling, however. My investment philosophy is to own everything long term and rebalance as needed. No modeling needed.
You are right about relationships. Keeping my clients fully invested and not panicking is my main mission – and thankfully over the past 10 years, I’ve been 100% successful with that endeavor.
Tim you make some excellent points and I admit to using (the now overused) sound bite “The Lost Decade” to highlight the importance of the planning process and having a good relationship with a your adviser, because markets do fluctuate and many need someone to coach them through such volatility. There certainly were returns to be had, but I suspect many consumers didn’t realize them because they panicked and did not follow the advice of a financial professional who had their best interests at the forefront or didn’t have a plan to respond to market volatility.
Thanks for your comment.
Ola! Amy Jo Lauber,
Thanks you for your post, The invention of the laptop computer opened up a myriad of possibilities for the itinerant businessman. Gone are the days when you had to carry a bulky attache case stuffed with unwieldy documents like a Thanksgiving turkey. Imagine the embarrassment of the pre-laptop days when you had to sort out stacks of printed papers in front of an impatient client.
I’m not sure what this has to do with my post’s topic but I agree that laptops have made our lives easier in some respects but more complicated in others. I mean, it’s sad when a pound of paper is required for disclosure because some people either can’t communicate their value or can’t keep their promises. But pound of paper or not, people still may or may not keep their word.