Streetwise for Sunday, September 16, 2018

Someone asked me recently, what is the most difficult part of being a portfolio (money) manager. It may surprise you but increasing the value of a portfolio is not the answer. That is the easy part.

No, the most difficult part does not even involve investing. It is protecting clients from themselves, and unfortunately, I am not always successful in doing so.

A couple came to my firm two years ago. They had previously invested approximately $600,000 in hedge funds through friends, and/or friends of friends. Any research appeared limited to personal recommendations. Those funds essentially evaporated.

Utilizing a portfolio of companies with a long history of raising dividends, resulted in a compounded average annual growth rate (CAGR) over that two-year period of 14.9 percent. Yet, they are leaving for reasons unrelated to their returns.

It seems that the son of an old family friend was joining a new brokerage office and they felt obligated to give him their accounts. Absent a prior track record of investment performance, and no requirement for fiduciary responsibility, they are again returning to the, “family and friends” investment philosophy.

The probability is high that their investments will be moved to a series of equity and bond mutual funds. The fees from those types of investments will dig deeply into whatever returns are generated. Bond funds will be hit the hardest due to inflation and rising interest rates. And yet that is not the scary part.

Although no guarantees were made per se, it is a serious violation to do so, the couple was given to believe that a 25 percent return was within the realm of possibility. From my experience, a return at that level is a rare, one-time occurrence. The only person to herald continual returns of that nature was Bernie Madoff.

While this couple was a somewhat unusual case, there is an ongoing need to continually allay investors’ fears of a market crash. A crash, they mistakenly believe, would be brought about because the current bull market is long in tooth. The suggested action to stave off such a calamity is usually to move to cash or bonds, the two worst choices.

Financial markets are buffeted by events of every nature, in much the same way that a sailboat finds itself at the mercy of the wind. Moreover, it is not unusual for the resulting volatility to reach melodramatic proportions. That is the nature of the beast. At the same time, Wall Street is inherently forward-looking. Anticipation, rather than actuality, often takes precedence.

It is the oscillation between anticipation and disappointment regarding the future of the global economy that has dominated Wall Street this past year. However, if Wall Street is anything it is fickle and investor sentiment can reverse in the blink of an eye.

Finally, it is not unusual to see mass hysteria, either positive or negative, wrap its icy grip around Wall Street and drive the shares of one or more companies well beyond reasonable trading parameters.

So, let’s cut to the quick. To start, 100 percent of the 5 percent corrections in stock market history were followed by a higher high. And if that does not satisfy you, 100 percent of the 10 percent corrections in stock market history were followed by a higher high.

And at some point, during 20 of the last 37 years, the equity markets have seen a peak-to-trough decline of at least 10 percent. These episodes always trigger anxiety and suddenly everyone is searching for the exits. Yet, the bounce back is generally quick. Stocks have posted full-year declines in just 6 of those 20 years.

Getting out of the market during a sharp correction often means locking in losses and forfeiting returns in a rebound. And it is impossible to time market inflection points.

Note to Readers: I will again be teaching Introductory Investment Analysis for the Ringling College’s Lifelong Learning Academy, now called the Osher Lifelong Learning Institute. Classes begin on Monday, September 24 and run every Monday for 8 weeks. Call 941-309-5111 or go to to register.

Lauren Rudd is a financial writer and columnist. You can write to him at Phone calls accepted between 9 AM and 3 PM at (941) 706-3449. For back columns please go to