365 days to your richest life: Day 4
You may be beginning to notice those posts are rather random. My intent is to give you something to think about each day, a thought that will — in application — increase the quality of your life through greater financial wellbeing.
Today I’d like to pontificate on the subject of investment, and though I’m hoping I can do that succinctly, I have a bad feeling this may take a while.
Twenty years ago, I believed — as you probably do today — that brokers, financial advisors and planners were professionals whose job it was to identify profitable investments. Then I spent 20 years working with the same — oh, wait, I was one — and found that it is truly impossible to identify those investments that will perform better than average in advance. That may sound like sour grapes, and perhaps it is, but the aha moment for me didn’t have anything to do with my own clients. (Perhaps the good news is that even vaguely competent advisors can generally, if they choose, keep their clients out of the worst investments.)
On the fateful day, I was doing some reorganization of my senior partner’s client files. With more than 25 years of experience, this fellow was very intelligent and informed and cared deeply about his clients. He spent hours each week using the latest analytical tools to identify the best-performing mutual funds, and then recommended them to his substantial client base. Going through those files, I realized I could tell what year each client had joined his practice by the mix of investments within their portfolio. I also realized, more upsettingly, that almost none of those investments had performed as well the year after they invested as they had the year before.
In the years since, I’ve become very clear on the fact that the investments that performed well last year are likely to be this year’s dogs, and that most advisors do not have the sales magnetism to persuade new clients to invest in last year’s underperformers.
The sales process is, in other words, at odds with the very foundation of investment success.
As disturbing as that is, there is some excellent (not just good) news in all of this: the value of financial planners, advisors and stock brokers is not in their ability to choose next year’s best-performing investments. What is their primary value? Well, for that, my friends, you’ll have to come back another day.