Updated Thursday, July 31, 2014 as of 7:43 PM ET
Blogs - The Advisors' Coach
A Financial Advisor's Delicious Experiment in Market Efficiency
Thursday, September 27, 2012
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Most investors have two fundamental questions:

1. How should I plan my wealth to secure my future and my legacy?

2. How should I invest my wealth to serve this plan?

I believe one way we can answer these questions is by embracing an asset class investment philosophy that can provide a simple, rational and prudent answer to the "how to invest" question. Instead of trying to beat the market, let the markets work for you and your clients. You can minimize the time you spend on investments and focus on being a great planner and helping your clients gain confidence in a potentially more secure financial future.

This philosophy can also help you better man­age what Nick Murray has called the "dominant determinant of real-life, long-term investment outcomes" - investor behavior.

Even before it earned the 2002 Nobel Prize in Economic Sciences for Daniel Kahneman, behavioral finance opened our eyes to how people really make investment decisions. While classical economics holds that individuals make rational economic decisions, behavioral finance shows that our decisions are often anything but rational and are colored by emotions, cognitive biases and faulty reason.

Though investors often act irrationally, there is also, as author James Surowiecki described it, the "Wisdom of Crowds." According to Surowiecki, the combined guesses of a crowd of people are often more accurate than most of their individual responses. This holds particularly true in equity and bond markets and is one of the driving factors behind Professor Gene Fama Sr.'s "Efficient Market Hypothesis" - the prices on traded assets (such as stocks, bonds, or even real estate) already reflect all known information and are the combined wisdom/guess of all investors.

An easy way to run an engaging "efficient markets" type experiment - and set yourself apart from the average advisor - can be carried out with a single jar of jelly beans. Here's what you do:

Step 1: Purchase a jar and a large number of jelly beans.

Step 2: Count the jelly beans and put them back into the jar (write the number down).

Step 3: Put the jar, a sign, and entry forms in a prominent display area of your lobby or reception area.

Step 4: Send out an email to your clients and prospects asking them to participate in this experiment.

Step 5: After a month count all the entries and come up with the average guess. You'll be surprised at how close this is to the actual number of jelly beans in the jar. Notify the winner and then send the results out to all participants via email.

Experiments like this make investor education fun and powerfully demonstrate to clients the power of collective wisdom - and how hard it is to outguess crowds. In addition, this experiment:

. Helps you build awareness

. Demonstrates why you believe in asset class investing instead of active management

. Allows for a discussion of what really matters to the client

. Provides you with "ammunition" if the client thinks he/she can outguess other investors

. Makes you appear different and more fun than the average Advisor (which may lead to more referrals)

Bear and bull markets may make your clients want to buck the wisdom of crowds, but your job as an Advisor is to keep clients from making bad decisions that could impair their long-term plans.

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