There was a certain biotech ETF I started eyeing last December. I had looked at a few biotech mutual funds and ETFs and, after researching which companies were the dominant holdings, I settled on one of the funds. Before I could get around to actually buying, though, the price started to rise. So I waited. And waited. You know how this story ends. (As I write this, the ETF I had settled on, but never bought, is up 124% for the year.)
I've tried (without any success, actually) to take solace in the fact that, while I didn't double my money, at least I didn't lose any money - unlike the time I read about a company that had developed ways to amplify certain flavors and smells in foods. Brilliant concept, I thought, and I love getting investment ideas from stories that aren't pushing a company's stock. I bought some shares. Many months later, I sold for a large gain. And naturally, I congratulated myself on my investment prowess.
Yet the stock kept rising. Frustrated that I hadn't timed the sale perfectly, I bought back in, betting the stock would continue rising. Once again, you know how this story ends. I let the "perfect" be the enemy of the good (in this case, the very good). Frustrated, the word I used above, proves to me that I allowed emotions to dictate my investment actions, a problem that frequently overwhelms investors and is a source of conflict in so many advisor-client relationships.
Indeed, Financial Planning contributing writer Craig L. Israelsen tells me, "Some clients spend far too much time quarterbacking from the armchair - that is, looking at the best performing asset class during the past quarter/month/week/day and then pestering their advisor about why they were not more fully invested in the past winners. Advisors face a continual battle of defending the prudent diversified portfolios they have built for their clients." Reflecting on the scores of conversations he has with advisors every year, Israelsen adds: "I'm surprised advisors still have any sanity when pestered by such nonsense."
It's nonsense, he explains, because clients "benchmark the performance incorrectly (against a single index) or irrationally (against the winning asset class during the past quarter or year). As a result, advisors who build sensible, well-diversified portfolios may engage in a never-ending educational effort with these clients to help them understand how to correctly evaluate the performance of a broadly diversified portfolio."
If this issue resonates with you, be sure to read Israelsen's story on the consequences of performance chasing. Based on actual returns from the past 15 years, Israelsen establishes "perfect" portfolios - as well as the actual returns investors would have realized if they had chased those hot investments. Clip out or email the story to clients. You may finally be able to prove that good is realistic and that good can be great, even if it's not perfect.