Top Ten Excuses > Investors have all sorts of excuses for not re-allocating
Many prospective clients are reluctant to change their portfolios, even when they agree things could and are likely to get much worse. They cling to their investments hoping that a miracle will happen and their stocks/funds will be spared. Their excuses for not doing anything would be laughable if it weren’t so tragic. To see investors clinging to losing investments is like watching a drowning man go down for the last time because he was too afraid to reach out to a helping hand.
Here are some of the most used excuses we’ve heard over the past few months:
1 – “I don’t want to pay the taxes.” This assumes there are gains left. In many cases, we have shown the prospective client that they had very little in the way of gains, ergo not much in taxes either. One of the first things we do when taking over a portfolio is calculate what the potential risks are and what the taxes due might be if the investments are sold. If the risks are higher than the taxes, the issue of taxes is irrelevant.
2 – “I don’t want to pay the fees to sell.” – This is one of our favorites. Investors are cutting off their nose to spite themselves with this one. Investors can be shown they have downside risk of say 20%, but will be unwilling to sell because of a 2 or 3 percent fee they might have to pay. After the declines of 20% plus this year, paying the fees should have been the least of their worries.
3 – “My broker doesn’t think I should change anything.” This one makes us crazy because he’s the guy that got them into the mess they are in - and they are still listening to him? Their broker didn’t see the market overvaluation in the late 90’s, but now has developed a great insight, which was lacking previously? Not likely. It is more likely that their broker only knows one way of doing things and wouldn’t know when to sell if he had tomorrow’s prices.
4 – “There is a buy rating on that stock.” No kidding. There’s a buy rating on just about every stock. Some dope even put a buy rating on Enron just before it went under. Wall Street still has a buy rating on the vast majority of stocks covered.
5 – “I’m in for the long term. Everybody says I should just “buy and hold”.” Investors love the status quo. They have had it drummed into their heads that they should “buy and hold” and that is just what they are going to do, regardless of how bad it gets. Many are actually more comfortable to be in a lousy portfolio that they have had for a while than to switch and do something new and different, like make money for a change!
6 – I saw a strategist on TV say now was a good time to buy.” These strategists have been saying this all the way down. And they will keep saying it all the way to the bottom. It is reasonable to expect the advertisers might have a problem with an investment show that bashed their company and products. So the odds of hearing real warnings about the risks of the market on TV are slim and none. (Not to mention that these strategists’ firms usually also sell stocks, so the only way to make money is to keep investors investing.)
7 – “I’m going to re-allocate after everything comes up a little.” The perennial proclamation of the procrastinator. They are waiting for their portfolio to get back to some mythical value it once was during the late 90’s. Then they get realistic and lower their sights to some arbitrary moment in time in mid 2001, then the value at the beginning of the year. And all the while the market marches lower and lower. And then when it finally does have an uptick, they say “see, good thing I didn’t sell I would have missed this 2.50% gain!” Meanwhile their portfolio is down over 25%.
8 – “What if after I sell, it all comes back?!” These investors are so down on themselves for having ridden the market down so far that they are convinced they can do nothing right. They are also convinced that since they can do nothing right, they will undoubtedly get out of their pitiful investments just before they turn around and have a miraculous recovery.
9 – “I think I will just go to the bank, where it is safe.” Not the greatest alternative if you have lost 20, 30 or 40 percent of your money. At today’s rates, it could take next to forever to rebuild a broken portfolio. And it is worse if the investor is retired and needs income of say 6% to live on. With banks yielding 1.50% in most places, it is just a matter of time before a retiree in this situation would run out of money
10 – “I haven’t lost anything until I sell.” This is the last line of defense for those in deep denial. If your portfolio is down 20%, 30%, 50% - you’ve lost money. It is the realization of that fact that prevents many people from pulling the trigger and doing what they know is right. So instead, they let things get worse and convince themselves they haven’t lost a thing. Selling would make them face their failure and frankly, not many people like to have their failures shown to them.
Most of these excuses are not based on rational thinking. Most are emotional responses and psychologically based. It is mostly about how the investor feels and feels about themselves. They can’t face their own failure (or their broker’s) and they blame themselves for the losses. So they make up a variety of ways to avoid facing the reality of losing a huge chunk of their wealth.
Even when they have found a money manager like Cornerstone Investments that predicted the decline, anticipated it and prepared our clients for it, they are frozen in place and don’t do anything. One prospective client in explaining why he was unwilling to do what he agreed was the right thing to do was that he was shell-shocked. This was the most honest answer I have heard yet.
Investors need to seek out money managers that have a good track record. The managers need to be able to document their early warnings to clients (articles written in 1999) They need to show positive returns for the past 2 years and 3 years (This shows they can manage money well during the bear.) and they need to have a different investment style than what the mainstream is pushing.
And then the investors have to get over their emotional and psychological hang-ups. The market isn’t going to wait. There is money to be made through re-allocation, but you can’t do it if you cling to any of the excuses listed above.
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