Most Popular ArticlesSeptember 29, 2009
The Alpha Seekers came into a tidy sum of money several years ago in their early forties after the selling a family business. They were guided into the arms of a highly regarded financial firm by their local legal and tax advisors and, for a few years at least, it was all about alpha. One could hardly encounter Mr. Seeker without hearing of a hugely profitable recent trade. In fact, it was rumored that their portfolio had nearly doubled at one point. Suffice it to say, things seemed very, very good to these inexperienced investors being guided by the excessive hand of their stockbroker.
The Alpha Seekers were leading a comfortable, if modest, lifestyle, but during the third quarter of 2008 they discovered one of the harsh truths of investing: It is a very sharp double-edged sword that cuts mercilessly in both directions.
As for me, I’m a former mainstream advisor turned passive investing zealot. Merrill Lynch hired me about a year and a half out of college and I went through what was then considered the best training program in the industry. Working through the local branch I did my time in the “cage,” the wire room, swept floors, answered phones, but mostly studied for the Series 7 exam. Upon passing, I was whisked off to the more formal section of the training which included things like the “Selling Skills Seminar”—not, I should note, the “Make Money for Your Clients Seminar” nor the “Understanding the Financial Markets Seminar.” No, the emphasis was totally and completely on prospecting and sales.
Eventually I went to New York City and attended classes at One Liberty Plaza, which now stands, as a stark reminder of the price of freedom, adjacent to the hole in the earth that we now refer to as Ground Zero. We studied every day, five days a week for three weeks and spent nearly every waking minute learning about how to create a prospect list, how to cold call and how to close.
No mention was made of concepts like asset allocation, risk, alpha, beta nor any other topic which might have saved my clients from the devastation caused by the market meltdown of October 1987.
Fast forward to 1998 and the founding of my own firm, an independent, almost exclusively fee-only RIA, which among other things is dedicated to avoiding the conflicts of interest that are so inherent in the investment industry. After getting caught up in the delusion that investment funds and mangers that beat the market are predictable in advance, a growing awareness began to take hold during the Bear Market of 2000 to 2003. I came to grips with the error of my ways and began bringing my clients over to a more “passive” investment style, using Dimensional Fund Advisors along with ETFs and index funds to build client portfolios. Mr. and Mrs. Patient were among my first clients to make the transition.
In 2004 the Patients began to move slowly but surely to a portfolio laden with bonds and low-cost index funds slightly weighted in favor of small value stocks. The results were magnificent. Luckily, through new deposits and rebalancing, the portfolio remained true to its intention of maintaining value while growing in a measured manner when markets cooperated.
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