Some Things Never Change…

The sun rising in the east, human ingenuity, the changing of the seasons, wars, and conflicts in the financial services industry.  These are just a few things that will never change.

I joke, but not really.  I hesitate to say that this new story was shocking, since it is something I've now come to expect:  Morgan Stanley Purges Vanguard Mutual Funds.  It is not at all uncommon for a brokerage firm to remove a fund company from its platform, but in this instance, when you read the reason why you'll probably be as upset as I was:

Brokers and consultants said that Morgan Stanley is almost certainly retaliating against Vanguard because of the Valley Forge, Pennsylvania-based firm’s longstanding refusal to pay for brokerage firm “shelf space” as part of its crusade to keep expenses for investors low.

With all of the "fiduciary" talk continuing to pick up steam, Morgan Stanley (and Merrill Lynch who is also mentioned in the article) have decided to not allow the largest fund company on the planet to offer its funds on their platform.  Not because of poor performance or high risk to shareholders, but because they wouldn't pay-to-play.  Because Vanguard's mission of keeping costs low for shareholders cannot co-exist with Morgan Stanley's need to make a profit.  And our industry wonders why we get a bad reputation?  This is exactly the reason we started Greenspring 13 years ago.  Several of us left the organizations mentioned in this article because we wanted to do what was in our client's best interest.  That often times could mean investing in the lowest cost mutual funds on the market.  Now Morgan Stanley is saying that won't be possible.  As we've said before, if you work with a broker at one of these groups, they are not necessarily bad, but the system is set up against you.  Don't hate the player, hate the game.

 

 

The Reward For Good Behavior

Many investors have been educated on the broad investment themes to improve their investment experience and outcomes. Some of the most basic include asset allocation (this determines the vast majority of both the risk and return of your portfolio), broad asset class diversification to reduce the overall portfolio volatility, and more recently lower cost mutual funds to improve the probability of better investment results compared to higher cost funds.

One of the most common concerns that clouds an investor’s vision of a comfortable retirement with large account balances or plenty of asset class diversification with sufficient retirement income is the inevitable equity market downturn. It has been eight years since the U.S. equity markets have had a significant correction and investors should be reminded and prepared for the eventual decline that comes with equity investing.  In fact, since 1929, there have been 25 bear markets (defined by a 20% loss or more).  On average, that means a bear market occurs approximately once every 3.5 years.  If history is any guide, most of us are going to experience several bear markets over our lifetime.

The future is uncertain and investing is often influenced by unexpected events, some good and others bad. Predicting when or how bad the next correction will be is futile but you can be prepared for it. Behavioral coaching is most effective when clients are prepared for the eventual ups and downs of the markets and prepared in advance of such unexpected events.

This is exactly when advisor behavioral coaching with clients is most important. Human emotion and fear can allow clients left to their own choices to abandon their financial plan and run for cover. Advisors use their past experiences to bring logic, patience and discipline back into focus for client conversations. Clients must realize and accept these downturns as part of the investment journey.  The reward for accepting this truth is gigantic.  Over the 87 years (from 1929 to 2016) that I quoted above, an investor who kept their money in the S&P 500 would have seen $1,000 grow to over $2.7 million.  It is important to note, that to generate this return they would have experienced 25 bear markets, everyone different in their own right!

Saying you need to be prepared and actually experiencing the next downturn can be challenging. What can you do to prepare? Here are several ideas. First, recognize that market declines will happen.  The sooner that you accept that you can’t control that piece of investing, the better you will be able to handle the short-term volatility when it occurs.  Second, review your asset allocation model and be prepared to rebalance if certain asset classes are either overweight or underweight versus their target allocations. Third, think about how much money do you have saved in your “rainy day bucket”? Clients could consider these cash reserves as their “first source of funds” when markets correct so they can avoid selling assets as they are declining in value. Finally, maintain balance in your portfolios and life. Broad asset class diversification can help reduce volatility in your portfolios. As it relates to your day-to-day life, turn off the news, stop looking at the declining asset values on-line or statements and go on with your life and trust that markets will once again have better days.

If It Sounds Too Good To Be True…

In Baltimore there is an investment firm that has flooded the airwaves with radio and TV shows guaranteeing 7% returns with no downside risk. Those of us who act as fiduciaries to our clients scoffed at these infomercials, but it didn’t take long for our clients to start calling us, asking why they weren’t invested in these can't lose investments. For the record, these “advisors” were pitching different types of annuity products to their unsuspecting clients. If you want to learn more about how these products work (warning: it’s complex), click on this short webinar I created to try to de-mystify these investments.

Getting back to the topic, as clients would call us explaining what they heard, the conversations usually went something like this:

Client: I just heard about these investments that guarantee you get a 7% return OR the return of the market, whichever is greater. Why aren’t we investing in things like this?

Greenspring: Were you listening to the “Money Guys” on TV?

Client: That’s it, have you heard of them?

Greenspring: Yes, but let me ask you a question, “How can someone guarantee an investment return of 7% OR the return of the market, whichever is greater, if guaranteed investments like treasury bonds are earning 2%”?

Client: I’m not sure, but that’s what it is.

Greenspring: I wish it were so, but the one thing I know from working in this field for a long time is that if it sounds to be good to be true, it probably is.

At that point, I would explain the product and how terrible it is. Thankfully, I don’t believe we’ve had any clients buy these products after we explained how they work.  As much as we all know deep down that there are no free lunches, I am amazed how many people still want to believe it. Fast forward to today, this investment firm has been permanently barred from the investment advisory business for “fraudulently misrepresenting the risks of their investment strategy”. The old adage about being too good to be true, is proven right once again.

Information contained herein has been obtained from sources considered reliable, but its accuracy and completeness are not guaranteed. It is not intended as the primary basis for financial planning or investment decisions and should not be construed as advice meeting the particular investment needs of any investor. This material has been prepared for information purposes only and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Past performance is no guarantee of future results.