How we can help you as a behavioral financial advisor

I have worked as a financial advisor since 1996. But because the term financial advisor is widely used throughout the financial services industry including life insurance salespeople and stock brokers, most people who I talked to don’t fully understand what I do for my clients.

There are two numbers that sum up what we do for our clients. Those two numbers are:

9.2%  and  2.5%

Does anyone have the slightest idea how those two numbers alone could describe what we do for clients? I haven’t had anyone initially understand, but after I described it, it seems people don’t forget.

The first number 9.2% is the annualized average 20-year total return for  large company stocks in the United States as shown by the S&P 500 Index for the 2o-year period of 1994-2013. Large company stocks in the S&P 500 are the well-known companies that are the best financed, best managed companies in the world. Think Exxon Mobil, IBM, Coca-Cola, Johnson & Johnson….

The second number 2.5% is the average annualized total return for the typical investor invested during this same 20-year period. This number was calculated by Dalbar Inc. (1), based on analysis of the average asset allocation investor return during this same time period. Dalbar uses the flows of investor money into and out of different mutual funds to determine this calculation.

But how could there be such a large disparity of almost 7%, you ask?

"7"

The answer to that question describes what we do for our clients. In simplest terms, the typical investor does not stay invested throughout the 20-year term in order to achieve the 9% average annual gain. Through a typical 20 year duration the markets will decline over 20% (known as a bear market) approximately four times. In each of those declines they are bombarded by the news media and their friends telling them that they need to sell the stocks because “this time it will be different”.

Most investors do sell during these declines. Understandably so, as it gets scary. The key is to work with someone who understands and tries to educate their clients that these market movements are the normal functioning of the capital markets. That is why we spent quite a bit of time preparing our clients for these downturns before they occur, so that they can make the appropriate choices during those scary times. We have discussed this many times in our blog about the fire drill preparation.

Additionally, when the stock market is booming (at times such as during the tech excitement), we will encourage our clients to stay diversified across the global stock market to avoid the potential corrections that do occur. We also ensure that they have a balanced investment portfolio including both money invested long term, and money that may be needed in the short-term in both cash and short-term high-quality bonds. This requires that we monitor the portfolio through time to ensure that we re-balance to the allocations as necessary.

The despair and over exuberance of humans is evident in the ebb and flow of the stock market. We help our clients stay on course and help them have the patience and discipline necessary in order to capture the higher returns.

I have these two numbers on my desk as a daily reminder of ultimately what we are trying to do for clients. Help them modify their behavior so they can achieve the goals that they have set for themselves and their family by having them capture the returns that the capital markets will provide for them.

So if someone asks you what I do for a living – just describe it as the difference between 9.2% and 2.5%.

(1) Dalbar’s Quantitative Analysis of Investor Behavior (QAIB) has been measuring the effects of investor decisions to buy, sell and switch into and out of mutual funds for over 15 years. The results have shown to varying degrees that the average investor earns significantly less than mutual fund performance reports suggest.

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About Dan Crimmins

Dan Crimmins, co-founder of Crimmins Wealth Management, is a financial coach and fee only financial planner. Have a financial question? ASK DAN

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