At the end of last year, 79% of advisors surveyed by GDC Research and Practical Perspectives indicated that the possibility of a jump in interest rates this year was the biggest reason driving them to make changes to their clients’ retirement portfolios.
Indeed, money poured out of bond funds last year as rate increases seemed certain because of the Federal Reserve Board’s announcement of a tapering of quantitative easing. So far this year, however, rates have declined. It looks as if maybe bond markets weren’t so stupid and actually understood that the United States couldn’t buy back its own bonds indefinitely.
But this isn’t an isolated example. T.D. Ameritrade disclosed that on Oct. 31, 2007, after five years of bull markets during which U.S. stocks had doubled and international stocks had tripled, the 4,000 advisors on its platform had only 26% of assets in cash and fixed income. When stocks bottomed on March 9, 2009, they nearly doubled the allocation to 51%. In short, they exposed clients to the fury of the plunge but missed out on much of the recovery.
It appears that, as a whole, advisors do chase performance. It shouldn’t be surprising that advisors are humans and subject to the same behavioral biases as the population as a whole. In addition, advisors want to please clients and, inevitably, clients want you to buy what’s hot.
Good advisors must resist human emotions, whether their own or those of clients.
In the example of bonds and the certainty of rates, advisors made two mistakes. They confused knowledge with unique knowledge. The decision to lighten up on bonds may have worked if only a few people knew quantitative easing couldn’t happen forever.
The second mistake was to buy the hype of a bond bubble. Stocks are riskier in a day than bonds are in a year. Last year, the Barclays Aggregate Bond Index declined 1.98%. So far this year, the stock market has declined by more than that on three separate days.
Allan S. Roth, a Financial Planning contributing writer, is founder of the planning firm Wealth Logic in Colorado Springs, Colo. He also writes for CBS MoneyWatch.com and has taught investing at three universities.