Saturday, October 18, 2008


While Advisors hide under their desks (OK not all, just most) a huge number of investors will make the panicked decisions necessary to complete the most common of investor strategies “The Buy & Fold”.
The B&F strategy is what I call a “naked cover strategy”! By the time the investor has lost their shirt (the naked part), their Advisor is taking cover ...hiding under a desk mumbling some insane non-sense about waiting out the storm, ( or yo-yo’s walking up a hill, or fund managers are on top of this, or my personal favourite – stocks are on sale)….basically covering their Advisor butts (the cover part) and hoping that you do not call the compliance area to report their idiotic investment strategy . That strategy of course is driven by the Modern Commission Theory (MCT ) and explains how we find a senior citizen with 80% of assets in equities at the top of the bubble!

How Do You Recognize If You Are In A Buy & Fold Investor Strategy ?
First, let me explain clearly, there are no B&F investors, only B&F strategies. Anybody with a bad portfolio can be involved in a B&F strategy. The key is to understand how it starts and how you can recognize the symptoms.

STEP 1: You choose an advisor based upon a recommendation from your buddy/bank/relative who actually know as little as, or less, about investing than you do.

STEP 2: The advisor uses a useless “risk questionnaire” to determine how much high risk equities they can legally push on you without you throwing up in a good market. This is also part of the cover strategy for the advisor and the related brokerage or fund house they are shilling for. You will note the advisor directing you to go up at least one level of risk from your initial thought so you do not get hampered by compliance issues later.

STEP 3: Utilize the MCT to sell you expensive and high risk options that include deferred sales charges (DSC) to ensure a change of strategy does not put future commissions at risk for the advisor. This is important later as you begin to get skittish about your losses.

STEP 4: The next step takes some time. It is the moderate drift in asset weightings to even more equities. In a good market it can be done by being too lazy to rebalance the portfolio. In a slow market it may be by directing new deposits to equities only. This step is vital to moving for example, a 55% equity balanced allocation to a 70%+ equity weighting. The longer you stay with the advisor the more the equity weighting increases and the less the investor asks questions.

STEP 5: The markets begin to drop and become erratic. You see fluctuations that start to erode your gains and come close to threatening your principal. You contact your advisor to see about reducing risk. Your advisor, with a big warm smile assures you now is the time to get aggressive! Yes, equities are on sale!
Chagrined that you had shown weakness, you jump in further and climb on the equity express. Each “dead cat bounce” in the market is another buying opportunity. Now we can often get our equity position up to 80% +.

STEP 6: You’re done. Your money is disappearing daily, you are afraid to open your investment statement, and you have not heard from your advisor in 2 months or more. The “fold” stage unfortunately is where you un-cover the mess you’re in. Your savings are nearly gone, firing your advisor is moot since you can’t find him/her and they do not return calls or emails. The advisor covers their butt, you cover your losses and hope you still have a roof to cover your head!

THE GOOD NEWS: You can bail out at any step. Just because you are in the B&F game does not mean you need to stay with the program until the bitter end. The fastest and least painful way out is as follows:

- Get an independent review of your investment process by a consultant that does not sell securities or work on commission.
- Use a professional service to find a proper advisor
- Get an independent professional to help draw up or review your Investment Policy Statement
- Either you or another independent body need to monitor the performance of your advisor.

One last piece of advice......Tell your advisor that equities are not on sale….new advisors are!
sois need to buy and fold now that you've been told!


Shane said...

Sounds all to familiar for most people. Good advise.

Anonymous said...

When investors were full of optimism the risk tolerance questionnaire was a great way to get investors to take more risk than necessary. Now when investors are risk adverse, i predict the risk tolerance questionnaire will go out of style and financial plans with bad assumptions will be the tool used to get clients into the asset allocation with maximum equities.