“Everyone has an opinion; the question is which opinions are actually relevant to your journey and which are just static in the air?”

— Kimora Lee Simmons

Extraordinary times tend to make “experts” out of the most inappropriate candidates.  This may especially be true when it comes to unusually volatile times in investment markets.  While it may be easy to ignore the opinions of your know-it-all buddy or your crazy uncle, some “experts” can appear to come with a bit more credibility.  Over the past 60 days, I personally witnessed some true rubbish come from the exact people who make a living by providing investment solutions to the public.  

The following three pieces of advice all came from licensed investment brokers (perhaps we need to make the Series 7 exam a bit more difficult).  I  wish that I had never heard them, but now that I have, I feel duty-bound to expose the flaws in their logic. 

 #1. Don’t Look at Your Investment Statements - It may surprise some readers to see that I do not support this one.  After all, I have been known to strongly suggest that people turn off the “Financial News” networks and stop listening to the rantings of talk radio personalities.  As I’ve explained before, it is their job to hold your attention long enough to sell some advertising, and fear is great for that.

I do not, however, care for a paid investment professional suggesting that clients keep their statements closed for their own well being (and yes, I’ve heard a broker give this advice).  I suppose the idea is that seeing account balances below their previous levels will simply cause more distress than the investor can stand.  This should not be the case if your portfolio had already been properly aligned with your risk tolerance.  In fact, if investors are hearing the inescapable buzz of the media talking about the drops in the S&P or Dow Jones Industrial Average, they may be pleasantly surprised to open their statement and find that a properly diversified portfolio had held up quite well by comparison.

The last thing I will say on this topic is that any broker who discourages you from looking at your accounts during difficult market conditions should be consistent and also not talk to you about it when account values are up.  Nobody needs a “fair weather” financial advisor.

#2. Do Not Withdraw Money in Down Markets - The explanation of this tidbit was that the broker assumed withdrawing cash would automatically involve selling stocks at a loss.  This assumption is garbage unless you are also assuming that your financial plan is tragically flawed, to begin with.  Any funds that may need to be spent in the short-term (and that includes a healthy emergency fund) has no business being invested in something as volatile as equities.  If one has executed proper financial planning and investment allocation, a few months of a down market should NOT result in the sale of stocks to meet short-term spending needs. If you need to withdraw cash, then you should be able to do so.

#3. This is a Good Time to Rebalance Out of Stocks - This is another case where context matters.  The broker dispensing this nugget explained that client portfolios are likely overweight stocks after a decade-long bull market following the “Great Recession” lows of 2009.  This should only be true if a portfolio had not been rebalanced FOR TEN YEARS!  If this is the case, any client should seriously question why they are paying a financial professional at all.  

To better understand this point, we will put it into numbers.  Assume that the proper risk/reward ratio for a hypothetical client’s retirement fund was found to be 60% stocks and 40% bonds on March 1, 2010.  Keep in mind that stocks (for this example represented by the S&P 500) handily outperformed bonds (Vanguard Total Bond Market Index Fund) during the 2010s.  Without any sort of rebalancing the same client would have a portfolio of over 78% stocks by March 1, 2020.  Not only is this portfolio considerably riskier than the recommended 60/40 portfolio, but it is common for the risk tolerance of the would-be retiree to actually reduce over 10 years, compounding the issue.  If the purpose of rebalancing a portfolio is to keep it suitable for a client, there is simply no excuse for going ten years without doing so.

Interestingly, if this same hypothetical client were on a quarterly rebalancing schedule, they would have actually bought into stocks a the end of the first quarter of 2020, not sold out of them.

Conclusion

The three examples above have quite a bit in common.  They are all things that I have heard investment brokers say to the investing public over that last two months. They all seem to be built on foundations of poor planning and poor service having historically been provided to their investors.

The lessons that we can take away from this are simple.  Not all investment guidance is created equal, and neither are the people who dispense it.  The investing public needs to be careful about where they choose to get their advice.