Fiscal Fitness - Stephen Bossio


Markets are random, planning provides control

Clients often see planners as visionaries; visionaries who use their unique talents to predict the future of the markets to the benefit of their clients. And why not, the financial community see themselves as visionaries. Open your newspaper, turn on your television or search the internet and you can find hundreds of investment professionals delivering economic predictions in support of their financial advice. Often, these professionals promote themselves as having developed an investment strategy that will protect investors from catastrophe (loss of principle), or allow their investors to benefit (get rich) while others miss out.

Financial services professionals will often tell you that their information is based upon their unique system for predicting the market. The explanations they provide sound logical and the conclusions seem reasonable, but do these predictions help you?

History can illuminate the challenges visionaries have had when making market predictions. Harry S Dent Jr. predicted two market events correctly n the 1980’s, but has followed with a number of misses, including his prediction that the DOW would reach 40.000 in 2005. In 2012, John Silvia, a chief economist with Wells Fargo was quoted as saying that interest rates will definitely rise in 2011; Gary Shilling who correctly foretold of the housing bubble followed up with a prediction that markets would drop in 2009, and so on. Meredith Whitney, Mohamed El-Erian, and Jim Cramer all who have had good times and some very bad times as well. So why do we listen?

According to Jason Zweig, author of “Your Money and Your Brain: How the New Science of Neuroeconomics Can Help Make You Rich,” humans are uniquely obsessive about recognizing patterns in random data. We want to understand the markets, to see the pattern because this gives us comfort. However, we usually think we have discovered a pattern where no pattern actually exists. Tragically, investors are no more susceptible to this than their financial professionals. Recent information shows financial advisors bought high and sold low, exactly opposite of what we’d hope to see, through the 2007-2010 market correction. Clearly the professionals’ market predictions, economic indicators and decisions to buy or sell based upon economic indicators and educated guesses fell short. So, why are we all trying so hard to find patterns in random events, knowing that history tells us all it’s not possible, at least with any consistency?

Maybe it’s because financial advisors feel it’s easier to manage money than it is to manage clients’ behavior. And so, the industry continues to promote an unproven process of prediction and subsequent action. A model that, at its core, depends on our ability to predict the future. These strategies are built upon a codependence for comfort.

Even during industry events it is apparent that financial planners are not comfortable with the idea of collecting in-depth and sometimes personal information from their clients. At a 2009 Life Planning trade show in Las Vegas, the attendees (financial advisors) challenged the appropriateness of getting into personal conversations with their clients, suggesting that such conversations were the purview of counselors’ not financial professionals. The keynote speaker kept asking how a financial advisor could possibly make recommendations if they didn’t understand their client’s needs and goals suggesting that money management should not be separated from a client’s financial life, but an integral part of a broader financial picture.

The practical real life approach of a planner is to first recognize that the markets are random and that predictive investment models are potentially flawed. It’s important that planners develop strategies that are repeatable, consistent and are not driven by their personal views. Recognizing long term financial success is supported by long range planning more than investment choices is the first step. Then clients and planners can break the dependency upon predictive investment programs.

A replacement model is available for those clients and planners that choose to embark on a deeper more focused relationship. A planner is best utilized working as a client’s personal CFO.

In this type of relationship the CFO coordinates all aspects of a clients’ financial life, including determining long term goals and setting a plan in place that includes, at a minimum, retirement planning, asset management, risk management, estate planning, insurance and college planning. These services, once reserved for the ultra rich, can and should be made available as planners shift from investment management visionaries, to Life Planners. Understanding the needs of the client with a focus on those area within the clients’ control becomes central to an efficient and successful financial life.

Stephen Bossio is a Registered Investment Advisor and the principal of Magnum Financial located in Sonoma California. He works with individuals in the creation of their long-term financial plans and provides low cost investment management services. To learn more call 707.996.9664 or visit Steve’s website at www.magnum-financial.com

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