Just over 10 years ago, I became a Certified Financial Planner™ professional, which means I’ve had some time to directly observe investor behavior (yes, my own clients). I define “happy clients” as those who are responsive, goal-oriented and long-term focused. They are the ones who refer loved ones who need financial help and bring baked goods to the review meetings (hint, hint). So, what about my clients who have had the least enjoyable investment experience? Well, they seem to have three things in common.
1. They Pay Too Much Attention
My clients who monitor their portfolio balances too often are those who know exactly how much their portfolio has dropped, in actual dollars, from a recent market high. It doesn’t seem to matter if their average returns over, say, 10 years are sufficient in keeping them on track to reach a goal. What is painful is “giving up $20,000 of profits since last Tuesday.” These are the clients who have apps to track market movements, read lots of economic commentary and check their balances weekly (or even daily!). Not to stereotype, but men are generally the guilty parties here. My female clients tend to be more goal-focused and, thus, better investors in this regard. Cheers, ladies!
2. They Are Performance Junkies
The business world likes to teach us that “we can’t manage what we can’t measure.” Fair enough, but what exactly are we supposed to measure our portfolios against and how often is too often? Is excess measurement based on fear?
A few fears come to mind:
- Letting the family down—being second-guessed by an inquiring spouse who trusted you to run the finances
- Knowing a bad decision was made—the allocation you chose or the advisor you hired
- Embarrassment—the brother at Thanksgiving who talks up his portfolio of five winning stocks
For these clients, underperformance relative to something else (the S&P 500, a friend’s portfolio, etc.) actually stings worse than simply having losses. As I wrote in “The Death of Benchmarking,” consider benchmarking your portfolio against your personal financial plan and long-term target return. You will dance around that return until the end of your life, never landing right on it, but a target return will act like a compass needle—allowing you to make course corrections along the way when absolutely necessary.
3. They Aren’t Good Savers
This is the granddaddy of ’em all. When my clients don’t save, the reasons feel justified (examples: my kids’ [insert expense here] is coming up, I have to add a new roof, I just bought a car, etc.). But without contributions to their portfolio, clients are forced to rely 100% on the markets to reach a future goal (assuming they have one). If you had a $500,000 portfolio and wanted to double it in 10 years, the non-saver would need to achieve an annualized return of 7.2%. The investor who adds $20,000 each year would only need 4.2% annually.
My happiest clients will tell you that they save to their portfolios on autopilot, almost never read market commentaries, review their statements no more than quarterly and probably couldn’t tell you what the S&P 500 is. So what’s that adage about ignorance?