How Volatility Affects Our Behavior
- Joshua M Brown
- May 13th, 2013
Leaving aside the nauseating and insulting lede in this article – that 93% of financial advisors had self-diagnosed themselves with PTSD as a result of the events of 2008 – there were some interesting details drawn about investor behavior and the way advisors switched their strategies for client accounts àpres le déluge.
During the height of the crisis, many financial planners did increase their risk-taking, the research found. Almost half of those financial planners followed by Klontz reported that the financial crisis caused them to dramatically rethink their strategies. Over the past five years, Klontz tracked the changing investment of financial planners. “There’s an entire industry that’s moving to tactical planning or market-timing,” he says.
A slew of recent studies of investment strategies have also confirmed as much. Some 83% of financial planners are moving away from buy-and-sell and toward market-timing, according to a 2011 survey carried out by newsletter and website publisher Bob Veres, a financial planner based in San Diego, Calif. Another survey by account provider Curian Capital similarly concluded that 63% of over 1,000 independent financial advisers also began switching to more tactical asset-allocation strategies.
Yes, everyone is a master market-timer now, as tactical as General Charles Cornwallis maneuvering his way across the American south.
I’ll say a few things about this:
Buy and Hold was dreadful for 15 months or so but has done an incredible service for these financial planners over the course of decades – especially for those who managed to control their own behavior and continue to rebalance during periods of tremendous volatility (there haven’t been many, despite all the PTSD nonsense).
Tactical, on the other hand, cannot be done consistently by a planner who is sitting in the conference room with clients and prospects all day. Hell, it can barely be done by people who spend all day studying market signals and timing tools. In fact, Mark Hulbert has proven to us quite conclusively that not a single one of the more than 100 most widely-followed market timers in the industry was able to play both sides of the 2007-2012 cycle and come out profitably. Once again, not a single one. But your financial planner / tax prep guy can do this effectively, consistently, efficiently? All while mailing out hand-written birthday cards to you and your entire extended family?
But don’t be fooled – a lot of what’s driven this shift is the desire of the clients themselves. When a planner sits down with a prospective client, one of the first questions they hear is “how did this recommended strategy do in 2008?” That’s shorthand for “How bad am I gonna get fucked the next time the shit hits the fan?” As a result, every strategy needs to have some kind of “answer” for 2008. This frequently means the planner will throw in some kind of a Black Swan fund, like Mohamed El-Erian’s PIMCO product for example, in which long-dated far-out-of-the-money options are purchased alongside a more vanilla allocation as a hedge against catastrophe. Either that or worse – some sort of Improvised Corrosive Device (ICD) cooked up by the advisor himself, like a 200-day moving average buy or sell signal resulting in all kinds of false positives, churn, short-term cap gains taxes and other brokerage commission friction.
The ironic thing is that, for most advisors (and their clients), it hasn’t exactly paid to be overly tactical since the Credit Crisis, except as a psychological salve – a safety blanket if you will. In some cases, market performance rendered tactical’s advantages moot and in others it actually cost them money, depending on how fee-heavy or poorly executed the strategy has been.
But fear not, the 145% gain over the last five years puts us well on our way to seeing the pendulum swing back the other way – pretty soon everyone’s portfolio will be fully invested at all times and the necessity of tactical allocation will be forsaken as the greed appendage, chopped off five years ago, begins to grow back.
This will be my fourth or fifth go-round watching this cycle play out. I’m enjoying it this time around.
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The Reformed Broker is a blog about financial markets and the economy. Joshua Brown is a New York City-based investment advisor for high net worth individuals, charitable foundations, retirement plans and corporations... More.