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Advisors on the Financial Crisis

October 6th, 2008 ·

Anyone can make money in a bull market. It is times like these that a good financial advisor earns her stripes — by counselling clients that bear markets are an inevitable part of being in stocks. While some advisors are ignoring concerned investors, a few are offering words of comfort to clients.

Rob Smith, a financial advisor and author of Dollars From Change, posted the note he sent his clients on The Wealthy Boomer blog. In it, he stresses the importance of investing long-term cash is a diversified basket of equities and holding it through the tough times:

I can’t estimate the value of your, or any, portfolio over the next 3-5 days, or 3-5 months, nor do I think anyone else can. I am tremendously confident though that over the next 3-5 years, we will look back to today as a time when buying investments – not selling them in a panic – was clearly the correct and most prudent course of action.

Many clients ask whether we should be getting out of the markets now to prevent further possible losses and then getting back in when things “feel better”. This simply does not work. It won’t “feel better” until after the market has risen and jumping back in then means you have missed the first, and usually the most significant, part of the upturn.

Andrew Baechler of PWL Capital shared a slide show that compared the current crisis with previous ones. Is it really different this time?

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17 responses so far ↓

  • 1 Dave in Kanata // Oct 6, 2008 at 8:52 am

    One contradiction of these buy-and-hold strategies is that you are told to stay invested over the long term and, at the same time, buy during these downswings. Buy with what if you are fully invested? I got out at the beginning of 2008 (for the most part) and am now buying some gems at bargain prices. I couldn’t do this if I never cashed in, or at least couldn’t do this to any great degree.

  • 2 Canadian Capitalist // Oct 6, 2008 at 10:19 am

    Dave: Trouble is it is tricky to get the “getting out” part and the “getting back in” parts consistently right. A well-diversified portfolio will have some bonds and it is very likely that the bond component is now high. That could be a source of funds. Another is to invest current savings. Market timing, on the other hand, is extremely difficult to get right.

  • 3 Dividend Growth Investor // Oct 6, 2008 at 10:32 am

    Dave,

    I agree with CC that the timing of purchases and sales is something that a very small number of investors could do consistently. Many studies suggest that the more active your approach to investments, the higher the probability that you will underperform the market..

  • 4 Al // Oct 6, 2008 at 10:46 am

    The TSX has dropped over 900 pts as of 10:44AM and is under 10,000. Ouch.

  • 5 ETF2X // Oct 6, 2008 at 10:47 am

    CC:

    I know you don’t believe in market timing but I have a different opinion. Since my Canadian timer directed me to get out of the market on June 12, the S&P/TSX composite index is down 31.8%. That one call gives those who followed the signal a hell of a leg up on a buy-and-hold strategy. Of course one correct market call doesn’t make anyone a hero but I have saved myself and others a small fortune this time round.

    For those who haven’t visited my site, it isn’t commercial - I’m not selling anything. I just want to put an alternative view out there that market timing may be of benefit to certain investors.

    I’ll stand behind a shield now and watch for the arrows coming my way from the buy-and-hold indexers. :>)

    Fred

  • 6 NN // Oct 6, 2008 at 11:19 am

    Fred, I assume your ‘timer’ is some form of technical indicator? These have been proven worthless, good luck with that over the long run.

    There are two ‘proven’ strategies for outperforming the markets - momentum investing and value investing. Buy-and-hold indexers believe the former to be risky and logically flawed, and the latter to require skill, dilligence and time they do not have sufficient of, so they settle for ‘average’ results that will beat probably 90% of individual investors and active managers in the long run. To me it seems like a good deal to be able to beat almost everyone by sitting back and doing nothing.

  • 7 Canadian Capitalist // Oct 6, 2008 at 11:40 am

    Fred: Any strategy should only be compared over the long term (at least 20 years) and the longer, the better. One or two correct calls are not sufficient. Also, the strategy should be applied to an entire portfolio. The Sleepy, which is my benchmark has 20% in Canadian equities. The overall loss in the portfolio is nowhere near what the loss in the Canadian portion is.

    NN: Amen. There is a reason buy-and-hold is a gold standard. It is something a “know-nothing” investor can easily replicate and extremely hard to outperform.

  • 8 ETF2X // Oct 6, 2008 at 12:06 pm

    NN:
    You have assumed incorrectly - I don’t use TA. We agree that TA is pretty much useless.

    CC:
    I have made statements on my site about the fact that the models’ performance is short since they are based on double exposure ETF’s which have been around for only two years and therefore long term conclusions cannot yet be made.

    The investment strategy used by each investor should be one that the investor is comfortable with and you are clearly comfortable with buy-and-hold. That’s fine. That’s what works for you.

    Others have bought on the dips. In particular, a number of investors on another forum were happy to buy Canadian banks on the dips starting last fall. That hasn’t turned out too well needless to say.

    From my experience, unless we are in a strong bull market, it helps to have a timer. There are times when it just doesn’t make sense to be a buyer. I prefer to see an uptrend in place before I start buying stocks.

    Fred

  • 9 gene // Oct 6, 2008 at 12:47 pm

    Good debate in the comments about market timing. Back to the original post, it sure is interesting that these mutual fund salespeople aren’t contacting their clients.

    I hate to see my portfolio getting killed, and I’ve been doing this diligently for 15 years. I’m used to periodic declines. I can imagine that investors with less day-to-day interest are very distressed. If their “advisors” aren’t there to help calm and advise them, are they really doing their job?

  • 10 Brendan // Oct 6, 2008 at 3:16 pm

    Dave in Kanata got lucky. Luck is not a good strategy.

    You are never “fully invested” anyways. Assuming you are an earner, you are periodically adding to your portfolio. And if you are not an earner, you periodically rebalance, which has the effect of buying low and selling high (since you are selling part of your overperforming assets, and buying some of the underperforming assets).

  • 11 Aleks // Oct 6, 2008 at 5:55 pm

    The thing about market timers is that they only tell you when they’re right.

  • 12 ETF2X // Oct 6, 2008 at 6:03 pm

    Care to elaborate on your statement Aleks? Most of the commercial timing sites I have visited have their past signals posted.

  • 13 Dave in Kanata // Oct 6, 2008 at 7:41 pm

    I agree with Brendan that I got lucky.

    It was actually this site that got me to read the book Juggling Dynamite. Between that book and the writings of people like Satyajit Das (among others), I changed my overall strategy and I got out. Now I am sitting on cash and ready to dollar-cost my way in. Though I agree that Mutual Funds are for suckers, I am not as convinced as many of you that (therefore) the “gold standard” strategy is a mechanical, shoot for the average one - albeit superior to 90% of mutual funds.

    My next lucky move, for the equity portion of my portfolio, is to - over the next several quarters - load up on BRK, MKL, and LUK and let them take care of my equity portfolio, including rebalancing (by the way, I have significant BRK which I did not and will not sell). These guys are the top, proven, long term value investors of whom you speak. Someone please tell me why this isn’t a better, less risky strategy than just indexing the whole market. (Yes, I know MKL has a large position in BRK).

  • 14 Canadian Capitalist // Oct 7, 2008 at 1:06 pm

    Dave: The reason why just buying the S&P 500 and holding it is a “gold standard” is that it is easy for an average investor to replicate for minuscule cost. Market timing, on the other hand, entails transaction costs, bid-ask spreads, capital gains etc. After accounting for these, does a strategy still beat the market? And if it does, why should it continue to beat the market in the future?

    Most strategies fail the first test. The few that seem to have worked in the past have a habit of not working any more. Why? The markets are adaptive systems. If I knew of a strategy that had a history of beating the market, I would adopt it. So would you. As would many other participants to the extent that what seemed a sure thing isn’t any more.

    I have no idea what MKL and LUK are. BRK would be a good bet to outperform the S&P 500 as long as Buffett and Munger are around. But Buffett himself values BRK based on its intrinsic value as opposed to market value. If you can value if you are paying a reasonable price for BRK, then of course, you should invest in it.

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