Warren's Wisdoms- The Best of Friends Must Part- 9/8/2005But when you find you can't make both ends meet Then the best of friends must part Irving Berlin (1908)
It would be a stretch to call it a �love/hate� relationship, I suppose, but I must say that my relationship with most financial reporters is at least strained. It is, after all, their job to come up with a timely comment that will scoop all the other reporters and sell some extra copies of their periodical or draw some extra viewers to their network. Ours is to guide our clients� financial lives � one at a time.
Most reporters are trained as writers and do not bring any special financial background to their assignments. Before you start hounding me with stories of writers who have changed your lives, however, I actually want to deliver a compliment today, to Jonathan Clements of the Wall Street Journal. He and I have disagreed many times in the past, most seriously a few years ago when he suggested that investors should put all of their money into tech stocks and enjoy the run-up that would last forever, planning on taking out a second mortgage if things got bad. This was a time when our clients were leaving the fold to chase such stocks and some even began day-trading their investment accounts.
At Warren Ward Associates we are financial planners. That is, we are concerned with all aspects of our clients� lives � including investments. One of the key insights we have to offer, we believe, is placing our clients� investments within the context of their entire lives and one of our strategies is diversification through asset allocation. In the late 90s, clients were annoyed that we�d take money out of asset classes that were doing extremely well and adding it back to those that were not. Quite a dark period indeed for my relationship with Jonathan . . .
However, he recently asked a very interesting question: �Why do investors cling to funds with lousy records?� (Read WSJ Article- click here)
One of the truisms of statistics is that half of any set is always doomed to be below average. Jonathan�s question is: why would otherwise good investors cling to mutual funds that haven�t performed well in years. Inasmuch as we are asset allocators, we often use fund categories which are generally out of favor but we always try to select a very high quality fund for our clients� investments in that sector. The answer to his question has more to do, I suspect, with the herd mentality of investors than anything else. Have you ever heard (surely not said) something like this?
If I�m investing in a famous fund, with an A-List manager, one that�s owned by a lot of other folks too, it must be OK? Right?
Jonathan asks his question, then goes on to give examples of funds which have underperformed the index against which they are benchmarked, as well funds with similar strategies. His list includes Fidelity�s Magellan fund which has failed to match the S&P 500�s performance in 7 of the past 10 years and according to our friends at MorningstarTM, has provided Below Average returns (vs. its peers) for the past 3, 5 & 10 years, while subjecting investor/owners to Average risks in the 3 & 5 year periods and an Above Average risk for 10 years. Are people heading for the door? Nope, in fact it still has over $55,000,000,000 (yes, billion) in assets under management.
It certainly can be difficult to decide to sell a stock or mutual fund that�s showing a loss � after all, that�s just admitting defeat. It might be helpful, instead, to think in this way: Given the current value of my investment, what�s the best way I can earn money going forward? If you decide your best bet is to keep your present selection, at least you now know why you own it. If you decide that a different strategy (or specific investment) might provide better results, maybe you could make up your mind to move on for that reason, or as the article says, �think of it as finding a winner�.
At WWA we do not, by any means, have all the answers but we do try to remove some of the mysteries about investing for our clients. If you own funds but can no longer remember the reason you purchased them, it might make sense to give us a call for an evaluation.
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