What To Do If You Are Deep In A Hole [iShares Barclays Aggregate Bond Fund]

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February 26, 2015 4:51pm NYSE:AGG NYSE:SPY

investDavid Fabian: I recently had a shocking conversation with a gentleman who was evaluating our asset management services for what was left of his once sizeable investment portfolio. As I often do with new investors that I meet, I asked him to give me a brief


synopsis of his recent investment history and financial acumen.

What he told me was unbelievable…

He started by relaying that he was wooed by a prominent asset manager on MarketWatch several years ago. A gentleman he described as being a tremendous salesman, but with very little regard for his clients’ best interests. This was prior to the 32%+ run in the SPDR S&P 500 ETF (SPY) in 2013. That year he experienced double digit losses in his portfolio.

I can’t even make that up.

He told me he actually tried to sue the advisor for gross negligence. Turns out that being bearish isn’t a crime, it’s just a really good way to ensure your marketing stays sharp and your profits remain elusive.

So in early 2014 he switched to an advisor at Morgan Stanley. How could he go wrong there? They are one of the most prominent investment banking and asset management firms in the world.

Well that year his returns were exactly zero, and the market once again gained over 13%. Even bonds, as measured by the iShares Core U.S. Aggregate Bond ETF(AGG) did 6% last year.

The reason for that goose egg is they had him far too overweight international investments and commodities, which were some of the worst performing areas in the global investment landscape last year. Essentially, any gains in U.S. stocks and bonds were just cancelled out by losses in those weaker areas.

By my back-of-the-napkin calculations, these steadfast advisers have now put him anywhere from 50-60% behind in terms of relative performance to the stock market in just two short years. Now certainly in a balanced portfolio of stocks and bond she would not have received the full thrust of a 100% U.S. stock allocation, but suffice it to say he is now deep in a hole.

The worst injustice is actually the time he lost that he will never be able to make up. There will always be an investment decision lurking out there that you wish you could have back, but you can often make that up through calculated adjustments and recovery time. In this case, he has now lost two important years of compounded growth opportunity.

His major concern now is that he doesn’t screw up on the next round. I mean you have to be gun shy after getting burned by two “professionals” and now sitting on a boatload of cash with both the stock and bond markets at unheard of levels.

The margin for error is razor thin.

So here are some thoughts that floated through my mind as I began to develop a plan for this individual on how they can navigate the next phase of their investment life:

  1. You have to put the past behind you and start fresh with a strategy that will achieve your objectives. While evaluating the missteps is important, constantly living in the past or chiding yourself will only lead to further bad decision making going forward.
  2. Don’t try to swing for the fences. It’s natural to want to stomp on the gas pedal to try and make up for lost time and money. However, putting all your eggs in biotechnology, cyber security, and Russian stocks is not the best way to make up those losses. Getting more aggressive in a late-stage bull market can have disastrous consequences for your money and compound your original problem.
  3. Focus on re-evaluating your goals and bringing your asset allocation in line with targets designed to maximize capital appreciation or minimize volatility. For most investors, that’s a mix of stocks and bonds that you allocate to slowly over time to establish the best cost basis possible. There may be bumps along the way, but you can make adjustments as needed to enhance your odds of long-term success.
  4. Tune out the noise. It’s instinctive to want to get more involved in learning this investment game by reading everyone and watching CNBC for 16 hours a day. Believe me – that will only make things more confusing as you start to absorb conflicting recommendations. Pick a few trusted sources to follow and make sure that you align yourself with professionals that share your same investment philosophy.

I spend a lot of time on the phone with people that are looking for the next rock star portfolio manager or maverick investor with the secret to unbelievable profits. Believe me, if that were me, I wouldn’t be on the phone with you discussing your Roth IRA. I would be on a beach somewhere trading from my iPhone and enjoying the good life.

There aren’t any shortcuts in this world when it comes to accumulating, investing, and preserving your wealth.

It takes time, tools, and discipline to achieve a successful result, and even then nothing is guaranteed.

The best deterrent to avoid falling in a hole is having a well-defined investment plan, monitoring your progress regularly, and not letting extraneous factors or opinions derail your strategy.

The only thing that matters when it comes to your investments is price.

This article is brought to you courtesy of David Fabian from FMD Capital Management.


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