By: Roger Nusbaum, AdvisorShares ETF Strategist
Add Yankee great, Jorge Posada to the long list of names of professional athletes who have been done in by their investment advisors. There are of course several accounts of this around the web but according to the NY Post he lost millions on a real estate deal and in a hedge fund run by his advisors. The Post implies he has not been totally wiped out but that Posada and his wife, who are referred to as naïve in the article, have taken a meaningful blow to their net worth.
For the past week I’ve had a post from Streettalk Live open in my browser titled 10 Legendary Rules From Legendary Investors that I planned to write about and I think I can marry that and the Posada story together in one post.
In past blog posts we have looked at how to keep investing simple and the extent to which I think the ‘legends’ of investing who can break it down into the simplest, plain English terms are the ones that most investors should try to learn from.
Included in with the rules was “the biggest investing errors come not from factors that are informational or analytical, but from those that are psychological” which came from Howard Marks of Oaktree Capital Management.
Often, the types investment products that did in Posada are sold in such a way as to appeal to vanity by way of exclusivity. The Post article cites comments from Posada’s attorney that his window for making an income was short and could have ended at any time and while that is not 100% accurate from the standpoint that contracts in baseball are guaranteed there is a bigger point made which is that a more suitable path would have been simpler investments that would have allowed the Posada to maintain their lifestyle when his playing days ended whether that meant no income or reduced income if he found work in broadcasting or coaching.
This is of course the same issue confronting most investors as a problem they will try to solve for themselves or that they will hire an advisor to help them solve.
It can’t be said enough, for most people this is solved with a simple portfolio constructed with funds and individual issues in a brokerage account. Further making the argument for simple is a point we bring up a lot which is that a simple indexed portfolio combined with an adequate savings rate can get the job done. Straying too far from that is what gets people into trouble like with Posada.
Indexing and holding on no matter what however, has proven to be very difficult for a lot of people. Talking about the next time the market drops 40-50% today, while things are going well and noting that whenever the next big one comes it will be followed by a new high at some point will easily be accepted as true. But we’ve seen that during the heat of the decline people lose that ability to reason which is why I believe in active management.
Planning to hold on no matter what can certainly be a valid strategy but you need to hold on…no matter what which, with a nod to Marks, is where people face the greatest challenge.
For some investors of course the context of active management is trying to beat the market but as I have been saying for years, beating the market is not necessarily the most appropriate goal for every investor. Obviously it would be great to beat the market every year but where doing that becomes essentially impossible and that the conversation quickly becomes about risk taken then attempting to beat the market has to be looked at in terms of suitability.
We’ve referred many times to the 75/50 portfolio constructed by John Serrepere. The portfolio is designed to capture 75% of the upside with only 50% of the downside, note it is not a static portfolio. If successful to the last basis point it would obviously lag often but spare investors a lot of pain. Put another way, its objective is to smooth out the ride which I believe appeals to many investors and is the approach I try to take (smoothing out the ride, not necessarily 75/50).
Investors who build a portfolio that places emphasis on dividends are not necessarily trying to beat the market either. They may or may not beat the market but in trying to create a certain income stream through dividends, that is their primary objective; the income stream created.
The most important thing is giving yourself, or your clients, the best chance possible to have enough when you need it. The way you plan to get there has to be suitable for your temperament. A valid strategy ill-suited for your temperament has very little chance of success.