The value of advice

“Investors diligently seek investments that they hope will produce the best returns but lose much of that benefit when they yield to psychological factors” --- DALBAR 2011 Quantitative Analysis of Investor Behavior

With stock markets making recent all-time record highs, many investors realize they may have made a mistake by selling, reducing or switching their investment portfolios in the past four years.

In 2008, the U.S. residential housing system teetered on the edge of collapse, bringing down banks, brokerage firms and insurance companies. As these giant U.S. institutions toppled, the Great Panic of 2008 - 2009 started. One of its first victims was the stock market.

Despite their financial adviser's counsel to increase holdings in down markets, many investors took to the fire exits, bailed out, jumped ship and kept on selling their stocks. For investors who didn't have advisers, they likely sold at the lows. Many of these people are never coming back or will be back only when the market gets high enough. See story below by clicking on this link:

 http://www.marketwatch.com/story/mom-and-pop-the-worlds-worst-investors-2013-04-04

For the remaining investors terrorized by the media's headlines of the time, even the staunchest investors were starting to eye the exit signs.

As scary as 2008 was, by early 2009 things got worse and stock markets continued to plummet with no bottom in sight. The U.S. benchmark stock market index - the S&P 500 dropped almost 60% from its highs in 2007.

And then on March 9, 2009 something magical happened and financial historians still don't know why, the stock markets reversed course, went up and kept going.

Currently, the stock market [S&P 500 Index] is about 130% higher than it was on March 9, 2009. Happily, the investors with advisers stuck it out, weathered the storm and today, are happily reaping the benefits of patience, determination and sticking with the plan.

This year, Canadians were still reducing equity positions and investing in bonds (bond funds and balanced funds). American investors however, seem to have shifted their attention to stocks a few months earlier than Canadians.

[Editor’s note: balanced funds are mutual funds that contain both stocks and bonds.]

Although the "Great Rotation"[1] back into stocks hasn't started yet, some money managers believe that some accumulated cash from previous years of non-investing is starting to be invested now.

So what have we learned from this lesson of history? Although I could write chapters about behavioral science, in reality the modern investor has learned nothing more other than to illustrate that people given the same circumstances, will likely react the same way as previous generations have always done. Human nature is indeed immutable. The internet, modern communications, smart phones, tablets and cloud computing has done absolutely nothing to change that cycle - other than perhaps to make bad investment decisions a bit faster than ever before.

One of the most important roles of a good adviser is to modify or prevent certain bad aspects of investor behavior that unmitigated (or left to the press) utterly destroys investor returns. The Great Panic of 2008 – 2009 certainly proved that investors should have a good adviser not only in good times but even more so – in bad times.

[1] “Great Rotation” – Investors massively piled into bonds during the last four and a half years. The “Great Rotation” refers to the possibility that this huge amount of money in bonds will be “rotated out” and switched to stocks.