Long-Always Client's Emotional Cycle

by: Danielle Park, CFA

The Typical Investor Emotional Cycle is a timeless chart that offers useful perspective on the euphoria and depression of most investors over full market cycles. You can see it here.

But the below chart from my partner Cory Venable offers further insight on point. We call this one the Long-always client's emotional cycle.

Click to enlarge
This example is based on the price (ex dividends) of the XRE - the Real Estate Investment Trust Index - since 2011, but we could use a chart of any publicly traded security, fund or portfolio to make the point.

Long-always advisors (brokers/dealers/planners/portfolio managers etc) are paid the highest fees to keep their clients buying the highest-risk assets at every point in the market cycle. But clients are only happy with them when asset prices are going up! Once the inevitable mean reversion starts, clients frequently fire the "advisor" and move to another one - who typically follows the exact same long-always approach. Maybe things go up a bit from there, maybe a lot, and clients think they are in a better place - until the same experience unfolds once more.

Up and down, round and round. Long-always advisors and managers are hired and fired each cycle, often at major turning points. In the process, clients repeatedly lose money, peace of mind and precious time.

This is the reason that a valuation discipline and careful allocation timing rules are critical to preserving and growing capital over full market cycles. First and foremost, capital must be treated as precious and critical savings, rather than a bag of gambling chips.

"Buy and hold" may be perfect in academic theory. It's certainly less work for management firms. But in reality, it's not well suited for real clients and their finite capital, patience and life spans. This is especially the case when, as today, markets are working their way through the third bubble top since 2000 and some of the least attractive valuation and return prospects ever in history.

Disclosure: No positions.