INVESTMENTS ARE FOR THE LONG-TERM

Most people say they understand that investments are for the "long-term," and their expectations are the same. Doesn't every good advisor promote this idea? I would say yes and no. Most people in this industry tell you what you want to hear whether they are investment advisors, financial planners, brokers, or insurance agents.

They take advantage of greed and fear by promoting products that satisfy these emotions. After all, who wouldn’t want the next hot stock, once in a lifetime opportunity, guaranteed rate of return, or the no downside deal? Who wants to wait years for an investment to grow when someone is telling you can get it now? It’s not very often that you hear financial advisors say something like “it might take 10 years before it pays off”. Instead, they tell people exactly what they want to hear! Unfortunately, far too many fall prey to these tactics.

The very nature of investing is patience as you literally forego the use of money in the short-term in order to have more at a later date. Our modern era of “we must have everything and have it now” is the enemy of patience. I don’t need to tell you how hectic and fast-paced our world has become with so much vast amounts of information and entertainment literally at our fingertips. Having so much readily available does not make it easy to be patient to say the least. Isn’t it ironic that as information on investing becomes more and more available, our ability to use it wisely often diminishes?

HARMFUL CONSEQUENCES

A lack of patience leads to many harmful consequences in all areas of life. If you took an inventory of how many times impatience has led to negative results in your life you might be surprised. As an investment manager it never ceases to amaze me how impatient people are with their investments.

Almost everyone claims they understand that investing requires patience and they are comfortable with their investment strategy. However, my experience has shown that once the markets start their normal gyrations, there are relatively few who stick to their plan. This lack of patience is exemplified by those investors who continuously make the mistake of “buying high and selling low.”

Those who were not able to wait out the last bear market and sold out during the downturn have done nothing more than lock in their loss, only to watch the market rally significantly and leave them behind. Many of these investors have run to bonds, which are at near historic low yields that are unlikely to gain the returns they need in the long run. They are buying at low yields and many might end up selling at higher yields (i.e., lower bond prices) resulting in capital losses.

Due to the severity of the last bear market and recession many (for now) have sworn off equities. My experience shows that after a few years of positive returns in the equity markets many decide it is finally safe to get back in – this again, after the equity markets have already moved up. On the other hand, those who were patient through the market turmoil and did not panic were able to see their portfolios rally nicely.

THE VIRTUE OF PATIENCE

Every good adviser should promote the virtue of patience to investors. Because this involves educating clients about the realities of investing instead of telling them what they want to hear many in the industry offer just a perfunctory reference to the virtues of patience. In fact, what usually happens is that patience is talked about only after a product or service has been sold. While it is definitely true that one should stick with a good investment plan, patience should not be used as an excuse for inactivity. Many good advisors construct appropriate and well-diversified portfolios for their clients at the beginning but then use patience as a justification for continued underperformance or inaction. To charge ongoing asset-based management fees in these cases is not justified in my opinion. If all that is done is to occasionally rebalance in line with the original allocation the fee should be very, very minimal. Why pay an advisor a continuing one percent of assets to perform a function that takes a few minutes a quarter or year at most?

PARAGON’S APPROACH

At Paragon, our clients pay us to continuously monitor the markets and their investments, and to actively manage their accounts – not just simply rebalance to the original allocation. Investing is an endeavor of alternatives and comparing them against each other. We believe in allocating to those areas that our analysis indicates offer the best return for the risk. We do not feel that it is useful to be in areas that offer a lower potential return for the risk in the name of diversification. This process of comparing the relative values and potentials of all investment areas keeps us objective and flexible. It frees us from the cognitive biases that constantly obstruct money managers and investors.

For example, one area we feel does not offer a good return for risk is in long-term bonds. Quite simply at these low yields an investor does not receive enough return for the risk posed by rising interest rates. Even if rates don’t rise in a detrimental manner we do not feel that the return offered by the long-term bonds is attractive enough when compared with the alternatives. Long-term government bonds are supposed to be “safe” investments but at these low yields they could contain a lot of potential risk and the return offered is not enough to compensate for that potential risk in our view. It is better to be patient and go with short-term bonds and other areas such as dividend stocks and wait for higher rates before buying them.

As for the rest of the market, we are now a bit more on the cautious side. Our analysis shows that we should continue to be patient with this market advance. Our models as currently positive and we will continue to stay invested as long as they maintain their bullish bias. As the economic recovery continues to take hold and is finally felt on Main Street, that self-reinforcing effect may help propel the market forward.