Figuring Out What Really Matters

by: Roger Nusbaum

Barron's had a profile on a registered investment advisor from Connecticut that included the following interesting comment:

Unlike many advisors, Rafal (the advisor being profiled) still fills part of his portfolio with individual stocks.

Based on who you talk to and the things you read, do you believe it is true that many advisors do not use individual stocks? Generally speaking I believe that most advisors do not use individual stocks and even if I am wrong about the word "most" it is pretty well accepted it is at least "many" who do not use individual stocks.

There are a couple of different messages from this. The simpler message is the extent to which simple investment products allow for building a well diversified portfolio capturing both broad and narrow exposure without having to take on the risk of stock picking which for some number of market participants is not something they want to do. By simple investment product I mean the ETF and OEF wrappers which are easily accessed and liquid.

The bigger point is an approach that focuses less on shorter term performance and more on achieving whatever longer term goals the client has in mind. I think it has been the case that RIAs set expectations that they think they can meet, the client needs to be on board with that or not hire the RIA in the first place and then the RIA either meets the expectation or not. In some instances the RIA outsources the management and the RIA and client together evaluate the manager.

It is human nature to focus on the short term but for most investors the short term is irrelevant to the successful (or not) implementation and execution of a financial plan. As I typically say in this type of post; without looking, how'd you do in the second quarter of 2010? Very few people will know the answer to that because in the big scheme of things it doesn't matter. No one who runs out of money will reasonably take solace from having out performed the market for three years in a row 20 years earlier.

Obviously I am a believer in using individual stocks but they are not right for everyone. The ups and downs of the individual names are more likely to trigger greed and/or fear than any broad based index and probably more than any specialized indexes that underlie niche ETFs. The big picture tie in is the extent to which people do more damage with behavioral issues than picking the wrong stocks.

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San Diego State played Syracuse on the USS Midway in San Diego yesterday. It didn't work out that I could go but the pictures from the game were amazing.