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Watch Out for Stink Bugs...

By Mike Minter, CFP®

Here’s the deal.  Financial Advisors need to make money in up markets for their clients.  Of course, if this is the case, then they will most likely lose money when the markets go down.  The difference between them is how much they will make or lose.  

Clients talk to people and watch the news.  When markets go up and they hear stories about how much money people are making, they better be making money too.  If it turns out they are even or losing money because an advisor took an extreme stance, it is one of the quickest ways a financial advisor will be replaced.  

On the other hand, when everyone is talking about how much money they have lost and how bad things are, clients can relate to what is happening around them and will accept losses like everyone else.  Clients may not be happy but they understand and most of the time, stick with their advisors.   

So you might be asking yourself, if that is the case, why don’t I just do it myself?  I can make money when the markets go up and lose money when the markets go down just like anyone else.  Well, depending on the overall advice you are getting, maybe you should…

A lesson I learned early in my career from a big producer was you need to have an opinion about what you think is going to happen. 

Advisors won’t be right all the time and they can’t be too extreme in the positions they take, but if they study history and do their research, they should have a better chance of outperforming their peers in the long run.  Not only that, but their clients will have more confidence in the advice and can justify paying for services.

But think beyond investing for a minute.

What other advice are you getting from your advisor?

If he/she doesn’t get paid for selling a mortgage, are they still taking the time to talk to you about rates and whether it makes sense to refinance?  What if you are worried you may outlive your savings or are feeling the effects of the economy and are strapped for cash every month?  Is your advisor giving you advice with cash flow so you aren’t depleting your savings too quickly or helping you find ways to maximize each dollar you make?  Are they reviewing your beneficiary designations and updating them when there is a death or when a child is born?  

Has your advisor educated you on simple concepts like compounding returns and how big volatile moves can ruin a portfolio?  

For example, take a $1 Million portfolio that loses 50% in year one and gains 50% in year two.  Many people at first glance think they are back to $1 Million but that isn’t the case.  After you lose 50% in year one, you have $500,000.  After gaining 50% in year two, you are only at $750,000.  In other words, you are still down 25% from where you started. 

FYI - Even if you switch the sequence of returns and gain 50% in year one, then lose 50% in year two, you are still at $750,000 or a 25% loss from your original investment. 

To get back to even after a 50% loss, you need to gain 100% and it can be a long time before that happens. 

Compounded returns are the only ones you can spend!

This is where stink bugs come in.  One of them found its way into my office the other day.  Now I was told that if you kill a stink bug, it leaves a scent that will attract others. 

So how does this relate to anything?  Think of it this way… If you take big losses, it is like killing a stink bug, once you do it, your problems start multiplying.

Bottom line…

A financial advisor should have an opinion.   They should have ideas about how to take advantage of opportunities, as well as, strategies for minimizing losses.  An advisor should also be well-versed in your overall finances and have the qualifications to address everything… not just investments.  

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