An investor’s own worst enemy is likely to be himself. Why it is important to find a trusted advisor and sounding board.
If you believe some of the world’s greatest investors, such as Benjamin Graham and Warren Buffet, it’s not investments that cause people to lose money; rather, it’s people who cause people to lose their money. What is meant by that is investing with sound principles and intelligent practices will always have a greater likelihood of success.
However, absent a sound investment philosophy with guiding principles and strict adherence to time-tested practices, investing becomes haphazard with a high degree of vulnerability to emotional and irrational decision-making based on short-term outcomes. In other words, an investing physician’s worst enemy is likely to be himself.
An Accountability Partner
To use a more familiar analogy, consider the physician who decides to get back into fitness. To ensure that he had a plan and that he would be doing everything correctly according to his objectives, he hired a personal trainer. They customized an exercise and nutrition regimen and began training together twice a week. After two months, the physician felt as if he knew exactly what to do, so he fired his trainer. After all he had the plan and he knew the regimen, so why pay for more training?
As one might have predicted, after two more trips to the gym, he stopped going. There was always something that came up or some excuse for not getting to the gym. But, the biggest obstacle was his mind which constantly convinced him that he was too tired, too busy, or too (fill in the blank) to go. He slowly began to realize why we pay personal trainers. Not to give us the plan or the regimen, but to avoid the behavioral traps that can cause us to lose focus and abandon discipline. It’s the trainer who holds us accountable and pushes us to achieve a level of performance beyond our current experience.
Sound investing is not much different than a commitment to exercising. It requires a clear objective, a well-conceived plan, tailored strategies and execution to be successful. A good financial advisor can get you at least part of the way, but the one who is most likely to break with the strategy is not the advisor; it will most likely be you.
It’s Not the Plan; It’s the Execution
Developing the investment strategy is actually the easy part. A good financial advisor usually gives that away for free. The hard part, for which financial advisors truly earn their pay, is to keep their clients focused on the target while coaching them to maintain patience and discipline. Essentially, the primary job of a financial advisor is to keep their clients from falling into the typical behavioral traps that can severely hurt long-term returns.
The real work of a financial advisor starts with an education process to help their new clients to understand that it’s not their investment strategy that matters most in investing success; it’s the investor’s behavior that will have the greatest impact.
A good financial advisor will be willing and able to be your investment coach, keeping you focused squarely on your long-term objectives rather than the market-shifting macro events of the day. He or she will help you avoid the many common behavioral mistakes that lead to underperformance, or worse, financial devastation.
Investing is no different than exercising. It requires a goal, a plan, a strategy and execution to be successful. There are many good Bay Area financial advisors with the ability to develop sound investment strategies. But the one who usually breaks with the strategy is not the advisor or the personal trainer; it’s the client. That’s why you pay a personal trainer – to keep you focused on your goals, hold you accountable, encourage you and keep you from hurting yourself. Those are the precise reasons why you pay a financial advisor; and any financial advisor, regardless of how they are compensated – who isn’t willing or able to be your investment coach is of no real value to you.