New Year, Old-Fashioned Investment Strategy
New Year, Old-Fashioned Investment Strategy
By PAUL SULLIVAN JAN. 8, 2016
The beginning of the year is the time when many people sit down with their financial advisers or otherwise seek out advice about their finances. And with stock markets’ rocky start to the year, that impulse may be greater this time around — that is, if people don’t run and hide.
While no one knows how the year will play out, plenty of so-called experts are lining up to offer their opinions. But how should you weigh what they advise?
Philipp Hensler, president and co-chief executive of Vontobel Asset Management, has some thoughts from his academic days. He wrote his doctoral dissertation in 2013 on how financial advisers reacted after the financial crisis.
As part of his research, in 2010 he asked financial advisers around the United States what they were doing differently in their advisory practices. They all said that the financial crash had been a game changer, but 80 percent of them said they weren’t doing anything differently.
The advisers gave typical reasons for inaction: They didn’t cause the crash; they couldn’t change anything; they believed the markets would eventually heal themselves.
What struck Mr. Hensler was that 20 percent of the advisers had used the crisis to rethink their roles. These advisers focused the most on their clients’ specific concerns, and not on investment returns alone.
This group had three characteristics in common. They were tuned in to the present investing environment. They were not leaning on what they had done in the past or what had happened years ago. And when new information came in, they tried to understand it without prejudging it.
“Others made 2008 an exogenous event,” Mr. Hensler said — an event that they considered beyond their control. “These advisers made it an endogenous event. They said, ‘It’s part of the system.’ ”
These advisers had “high contextual sensitive behavior,” he said. The rest were likely to be part of what he termed the “equilibrium of collective wrongness” — they had no desire to change what they had done wrong, because everyone had been wrong and they wouldn’t be penalized for it.
This distinction matters, Mr. Hensler wrote in his dissertation, because the smaller group of advisers persuaded their clients to focus on what they needed the money for and had better results for it.
“They were humble, and it made them contextually aware,” he said. “They weren’t focused too much on the market but more on the client.”
For investors who rely on advisers, these traits could matter if markets continue to be bumpy this year, as some experts predict. But relying on advisers alone, even in good times, is misplaced, said Norton Reamer, the former chief of Putnam Investments and the founder of two asset management firms that he has since sold.
In “Investment: A History,” to be published next month, Mr. Reamer and his co-author, Jesse Downing, write that more people are able to invest their money today than at any time in history. “Yet for most of us, we have not made the leap to the challenges and responsibilities we have been given,” Mr. Reamer said in an interview.
He said individuals, no matter their background, needed to take a greater role in their financial lives. Mr. Reamer, who is 80, has laid out four principles to help the layperson think through investing.
Think of every investment as something you really own. Look for the fundamental value in that investment. Use only moderate financial leverage, like a mortgage, in your financial life. And pay close attention to how your money is allocated among investments.
Mr. Reamer readily admits that none of these ideas are new. “The book wasn’t intended to give investment advice, but I couldn’t see us creating an entity of this kind without some guideposts,” he said. “The best way to look at these things is to understand what’s deep down inside. You can’t always do that yourself. But you can work with people who do.”
Even this may seem like more than many people want to do. But Mr. Reamer makes an argument akin to what doctors tell patients: There is only so much that even the best physicians can do if patients do not do their part.
“It’s not sensible or reasonable for any person to be completely mindless about investment,” he said. “Investment is a basic element of human identity. As assets have grown in the hands of the common man or woman, and not nobility, it’s become an opportunity and a responsibility to have a reasonable understanding of what investment opportunity and risk is.”
As for advice on what to do this year, recommendations from Mr. Hensler, Mr. Reamer and others were not what anyone would describe as hot tips. They were sensible suggestions, regardless of the investing environment.
Mr. Hensler said people should focus on companies with strong competitive positions and high earnings growth that they could understand. And, he said, they should avoid overconfident advisers.
“If I was a client, the adviser I’d stay away from is the mechanical adviser,” he said. “This is the one who has some sort of process — ‘I’m going to ask you three questions and plug in the numbers and take the 50-year average as the assumption.’ That mechanical behavior is contextually insensitive.”
Karl Wellner, chairman of Papamarkou Wellner Asset Management, which manages about $3 billion, made an argument, akin to Mr. Reamer’s, for looking closely at where your money is going.
“Just because it says Dec. 31 doesn’t change the fundamentals,” Mr. Wellner said. “Companies don’t change overnight because the calendar says so. We talk about quality. Quality wins at the end of the day.” He added, “More than ever when times are volatile, it’s more important to have managed mandates.”
John Apruzzese, chief investment officer at Evercore Wealth Management, which advises wealthy clients, said he was directing all clients to focus on making good choices. Constructing a portfolio strategically is the key to staying on track if markets get scary this year, he said.
“As far as the stock market goes, you can’t predict it over one to two years,” Mr. Apruzzese said. “Over a longer period stocks represent the highest return on investments, so it’s a time horizon issue. That gets back to portfolio construction. You don’t want to have such a high proportion of stocks that they panic and sell out at the bottom.”
As for Mr. Reamer, with his six decades of experience he offered the surest advice of all: diversification. “The lessons of investment theory have shown that diversification is a powerful tool whose risk-adjusted benefits are practically free,” Mr. Reamer wrote.
That’s boring advice, but it may be some of the best when there is so much uncertainty going into this year.