Thursday July 24, 2014


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Invest With Purpose

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Recently I became familiar with a situation that seems to defy rational explanation.

A person owned some mutual funds that were selected by an advisor. These mutual funds were appropriate for the clientís long-term objectives.

The client also owned some stocks. These stocks were a couple of junior oil and gas stocks, and they were selected by the client. The advisor was merely acting as an order taker for the stock purchase.

A couple of years go by. The mutual funds are up by a few dollars. The short-term returns on these long-term investments would be in the single digits. The returns are positive, but nobody is bragging too much. This performance is consistent with benchmark, however. Over this particular time period, the mutual fund returns are more a function of the market conditions than the specific product.

The stocks, on the other hand, are down by about 40 percent.

So, to summarize: The mutual funds, which were purchased with the objective of achieving a long-term financial objective, are consistent with the clientís declared objectives and risk tolerance, and are performing in line with comparable products, were selected by the financial advisor. The stocks, which have wet the bed, were selected by the client.

So now that we are a few dozen months into a long term plan, guess what happens? The client sells the mutual funds and keeps the stocks.

††††††††††††††† There are a number of aspects to this that make it fascinating.

††††††††††††††† Why would the client sell a diversified portfolio of professionally managed investments that has competitive performance, while simultaneously keeping the amateurly selected stinkers? After all, what is the mutual fund but simply a collection of stocks? So why sell a diversified collection of stocks that are professionally managed, but keep the ones that were self-selected?

††††††††††††††† It is possible that the client wants to keep the stocks because he has some sort of attachment to them. Maybe he actually knows the company very well, and is comfortable with its prospects for the future. As reasons go, this is a good one.

But, although it is possible that he knows the company very well, it is far more common that he is making one or more amateurís mistakes.

It could be that he doesnít want to sell the stocks because that would be tantamount to confessing he made a mistake on the purchase, and who likes admitting they made a mistake?

It could be that he is fixated on the price that he paid for them, and intends to sell ďonce the stock recoversĒ. The problem with that is the stock doesnít know what price he paid for it, and the stock doesnít care what price he paid for it. In other words, this really just comes down to pure blind hope that the stock will recover in price, with no rational framework to base that recovery on.

It could be that he assigns more trust and faith to whatever it was that he relied on to make the stock purchase than he does to the skills of his advisor and the professional money manager running the mutual fund. That occasionally might be appropriate but, more often than not, amateurs do not select stocks based on extensive research. They buy them for whimsical reasons, and whimsy is not a very good approach for making informed decisions.

Why would the client even be evaluating a long-term portfolio on a short-term basis in the first place?

††††††††††††††† Why would the client sell the mutual funds?† Itís not relative performance; the funds are performing fine relative to their peer group. It could be pure impatience based on the unrealistic expectation that long term results happen instantaneously.

And what is the client thinking that he is going to do next with the proceeds of the liquidated mutual fund?

It could be that he is looking at his stock-based portfolio and comparing it to a fixed-income strategy. Thatís nuts, but itís happening all the time. Itís the equivalent of finding a week during which Hawaii experienced inclement weather at the same time that Fort St John saw some sun, and from that extrapolating that Fort St John must have a better climate than Hawaii.

What people need to understand about fixed income investing is that the glory days are behind us. Nowadays the yields are ultra-low, but it gets worse. Build taxes and inflation into the equation, and these products have negative real returns, with no meaningful prospects for doing much better.

People who are scared off the equity investing by variable returns and instead putting their money into fixed income investments are behaving like the old story of the ostrich that sticks his head in sand, thinking if he canít see the danger he is safe.

Inflation is the danger that you canít see. Donít be an ostrich, and equate pretending risk isnít there as being the same thing as protecting yourself against risk.

††††††††††††††† I canít say for sure why the client did what he did. The bottom line is that you should make your financial decisions with good reason. Fear, greed, whimsy, and impatience really are not reasons; they are merely how you justify your impulses. Donít be impulsive. Invest with purpose.†††††††††††††††

The opinions expressed are those of Brad Brain, CFP, R.F.P. CLU, CH.F.C., FCSI.† Brad Brain is a Senior Financial Advisor with Manulife Securities Incorporated, in Fort St John, BC. Manulife Securities Incorporated is a Member of the Canadian Investor Protection Fund. Brad Brain can be reached at

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