An analogy to drive home the point

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Last Friday I met up with a good friend of mine for a few drinks. He’s been working in the investment management field for as long as I have and is very familiar with the psychology behind client behavior.

We got on to talking about the markets and I told him that I had recently lost a client. I told him, my client decided to trade stocks on her own, attempting to outperform the market. He looked at me and rolled his eyes and we both just smiled.

I knew, from his own client experiences, he was thinking the same thing I was… ‘another client making a poor decision, overcome by the emotions the markets can evoke.’ In this case- Greed. (A lot of time that emotion is Fear)

Glass Menagerie

I was telling him it was very strange how this all went down. If a client is uncomfortable, or there is trouble in paradise, I can usually sense it from a mile away. I pride myself on the open line of communication I have with all my clients and if someone is unhappy I know it.

In this case, I was completely blind sighted. If anything, she seemed to appreciate me more than most clients. I felt like we had a great relationship and I was caught off guard by the defection. It bothered me because it happened so suddenly and without warning, I just didn’t see it coming and I felt hurt.

But that’s life in the big city and when money is involved I’ve learned to expect anything. After some self reflection, I believe there’s a few things I could have done differently and definitely will learn from the situation.

One of the lessons that was reinforced (again) was, no matter how good the financial planning experience, relative performance is not always good enough. Human nature is very fickle and people don’t want to feel like they are missing out on anything.

But I’ve made my peace with that situation, learned from it and am moving on.

Friendly piece of advice

For any financial planners out there, in love with the planning process, this one’s for you. A great relationship and a solid financial plan are sometimes not enough… you need to back it up with performance and don’t forget it.

If you achieve a 9% return for a client, which is above and beyond the return needed to meet all of that client’s dreams, it still may not be good enough for a segment of the investing public. Especially, in an environment where markets are near all time highs and everybody has a friend ‘that made 40% over the past 12 months.’

FACT: Some people want what they don’t have, regardless of how good they have it.

Oh geez… the analogy, I almost forgot.

Pipe dreams

The analogy I most often use to describe investors who position themselves too aggressively, craving the highest possible returns, has to do with speed. It goes something like this…

Why is it that some people feel the need to drive 90 mph in a 50 mph zone?

• maybe because they don’t know where they’re going?
• maybe because they don’t know how much time they really have to get there?
• how do they know that they’re even late to begin with?
• If they knew they could drive 65 mph and get there on time, do you think they might not drive so recklessly?

The problem is most people don’t know the answers to any of these questions!

And because they don’t know, human nature tends to overcompensate. Therefore they speed, with a higher likelihood of getting into an accident, blowing a tire, or getting a speeding ticket, etc.

Do you think that if they knew in advance they’d arrive on time comfortably, that it might change the way they drove and the speed they drove? The answer is most probably YES.

Well a formal financial plan is the GPS for your investments and much more; it should give you the knowledge and comfort to make sensible life decisions. A good financial plan (and planner) help you to effectively manage risk and dampen the impulse to chase pipe dream returns.

In the end, pipe dreams only open you up for more risk than you ever needed in the first place.

The need for speed

But some people don’t want to hear it. There’s that segment of the population that just can’t help themselves, they want to drive 90 in a 50, they just feel the need for speed. They have a bit of gamble in them, they wanna put it all on the line. I’m glad to weed these kind of people out…

Tags: Psychology Behind Financial Planning