Do you have “reasonable expectations”?

September 14, 2016

“Your recommended allocations look like an endowment portfolio, designed to survive centuries regardless of economic conditions.” – Dean M.

Dear Friends,

I’ve been getting a lot of emails from financial planners asking for advice. I normally am not aware of their position until the tell me. In the following case, for example, the writer noted that he listens to my podcasts while riding his tractor. I, of course, assume he is a farmer.

Mr. Merriman, Thank you for your podcasts! I listen to them in my vehicle and while on my tractor. Always great, honest information – Andrew H, Greenville, SC

I answered Andrew’s questions but had to mention how pleased I was to picture him on his tractor listening to my podcast.

Hi Andrew, Having grown up in the orchards of Wenatchee, Washington, the picture of someone listening to my podcasts while riding their tractor makes me smile!

It turns out, in the following email, that he is a financial advisor who considers my podcasts “Tractor Therapy… that helps soothe the soul after a long day of dealing with the financial markets.”

My goal has always been to help investors find steps to make more money, at less risk and more peace of mind. I am thrilled to learn that I also may be helping professionals deal with the challenges of being an advisor.

I suspect most individual investors give little thought to what challenges financial advisors face, but such insight may help with your relationship to your advisor. Some firms have minimums of $500,000. In those firms, the advisors are normally limited to working with 150 to 200 clients. Other firms have minimums of $50,000. In those cases, advisors often support 300 to 500 clients. In either case the challenges of dealing with 150 to 500 clients can be exhausting. Unless an advisor is very selective in the type of investors they serve, they will find the differences in their clients can take an emotional toll.

From an advisor’s standpoint, here are a couple of realities of dealing with investors: many investors claim much more risk tolerance (especially in bull markets) than they will have when the market goes through a traditional bear market; many investors have a difficult time understanding why their diversified portfolios aren’t performing as well as another segment of the market that is performing well (that is particularly difficult when the S&P 500 is the top performer); and in years that they lose money, investors can’t figure out why they should pay their advisor to lose money.

Another of my goals is to help investors create reasonable expectations. If they do, I believe they will become better clients of advisors who are committed to doing the right thing for the client’s financial future (as opposed to the right thing for the advisor). For more on hiring an advisor, read my free eBook, Get Smart or Get Screwed: How To Select The Best and Get The Most From Your Financial Advisor.

What motivates people to want to pick individual stocks?

On the subject of “reasonable,” a MarketWatch reader commented, “It is incomprehensible to me why anyone would pay a fee to do exactly the same as some arbitrary index.” He then explained why he thought it preferable to “pick a handful of individual stocks at random from an index fund, thereby saving on the fund fee, trading expenses and capital gains taxes while having an even chance of doing slightly better or slightly worse than the index… but what difference does it make?”

I replied that I am sure there are a lot of MarketWatch readers who agree with him. While some investors have the knowledge and the money to properly diversify with individual stocks, most do not. I don’t, and I’ve been around the industry for over 50 years. However, I do know what I want. I want exposure to large and small cap value and growth, emerging markets and REITs, U.S. and international. I have no interest in trying to find the best 20 to 100 companies that best represent these very profitable asset classes. The most efficient way to do that is through index funds that represent those asset classes.

One of the most interesting debates concerns the choice between beating the market or just being the market. Studies show that most investors will make less than the market while trying to beat it. The index fund guarantees almost all of the return of an asset class without the risk of meaningful under performance. Yes, some stock pickers may do better than the market. In fact, after 50 years in the industry I have yet to meet a stock picker who expects to make less than the market. It’s the optimistic nature of most investors who build portfolios of individual stocks.

Many years ago I was invited to speak at a series of conferences put on by Bill Donoghue. His “Mutual Fund Superstars” conferences were very successful as the speakers represented some of the highest-performing fund managers. I was not one of the superstars but a lowly educator and moderator. It was great fun. One of the things that interested me was the position of almost every great manager. They admitted that index funds would probably do better than most of the managers at the conference, but they had a special approach that would do better than the indexes. They were no different than all the retail investors who think they will beat the market. Well, there was one significant difference: if they didn’t make the case for beating the market, why would anybody trust them with their life savings?

Most of the stock-picking investors I know are fully aware they are likely going to underperform the market. They know I have the evidence that shows their quest for market-beating returns will not likely pay off, so they tell me the real reason for taking the time to pick individual stocks: some do it for fun and believe their return will be okay, others for ego and bragging rights. One very honest investor told me, “Putting together my stock portfolio is probably the only place in my life that I am really in control.”

In another related topic, responding to my article, “Six Lessons For A Beginning Investor,” a reader wrote: “The year was 1929. A reporter accosted Mr. J.P. Morgan on the sidewalk and said:  “Mr. Morgan! What’s the stock market going to do?” Mr. Morgan stopped and said:  “My good man, as it happens, I know EXACTLY what the market is going to do!  It’s going to FLUCTUATE!” And that’s the truth of it…”

I replied that this is an important truth but there’s another worth considering: While the market has an unending series of fluctuations, the long-term trend has been up. Of course if we invest in individual companies there is a possibility that the investment can end in a complete loss of all capital.

Isn’t it interesting that some people think they are in control, while others think the whole process is random?

Q&A’s – The next “Ask Me Anything” live chat session takes place Wed. Sept. 21 at 1 p.m. EST. You can login to the session or send your questions anytime prior to:

To your success,



The investing mistakes I’ve made and what you can learn from them

This is a hard column to write. None of us is happy to look back at where we went wrong. More






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