A Modest Proposal To Keep Investors From Shooting Themselves In The Foot: Financial Advisors' Daily Digest

by: SA Gil Weinreich

Summary

Dalbar issues its latest chronicle of investor underperformance.

Lance Roberts evaluates the Dalbar study and offers tips for advisors.

Your humble correspondent offers his own seemingly obvious solution.

As it has done annually for over two decades, Dalbar's famous investor behavior study - now in its 22nd year - continues to find that individual investors trail overall market performance, citing classic behavioral errors such as buying high and selling low.

Lance Roberts has written up an analysis of the latest Dalbar findings, with a focus on what advisors can do to recognize these tendencies and protect their clients from themselves.

The diagnosis and proposed solutions all sound reasonable, but I'd like to suggest my own suggestion, which strikes me as extremely obvious.

Since, in a crisis, people have a tendency to want to do something, it would seem that advisors could add significant value by making the steady raising of cash a portfolio planning priority. The idea is simple: raise cash to a) provide a buffer in time of crisis and b) as a means to go shopping when prices fall during said crisis.

(I don't claim to have invented buying low - I'm suggesting that advisors formally facilitate this concept in their client investment plans, and mention it here because it goes unmentioned in the two cited reports).

Sure, portfolio optimizers like to be all-equity since markets rise more than they fall. But, since nobody knows when stocks will fall, the above proposal seems like a safe way to make up for being less than 100% invested in stocks. Isn't it the "greedy" investor who ends up blowing up when the bubble pops?

So what do you think about this suggestion? Are we doomed to read Dalbar's 40th annual chronicle of investor underperformance years hence?

For now, here are today's advisor-related news and views: