Sunday, March 13, 2011

For Investment Success, Don't Just Do Something

From Paul Sullivan's Wealth Matters column in The New York Times:
[A study by Philip Z. Maymin, an assistant professor of finance and risk engineering at Polytechnic Institute of New York University] found that the value of investment advisers was not in the stocks or mutual funds they recommended but in their ability to restrain investors from impulsively trading at the wrong time. It cites data showing that aggressive orders by individuals can cost them about four percentage points a year.
Four points! Consider a $1 million portfolio that's underperforming by four percentage points. Suppose a professional investment adviser shrinks that lag by two percentage points (the adviser needs a 1 percent fee, and the client demands a little action, so sector rotation and tactical asset allocation take away a second percentage point). Over ten years, that improvement in the return from a $1 million account will enrich the investor by over $218,000!

In theory that kind of difference ought to make it easy to market the "Don't just do something" approach. The reality? Never happen. "Big gain!" sells. "Smaller loss!" doesn't.

The best we hapless marketers can do is dissemble, touting benefits ranging from irrelevant to fanciful. But when we do our job successfully, we save investors a bundle.

Related posts:

What Can You Promise?

How Investment Advisers Earn Their Keep

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