If producers believe the hype, today's investing has become an endeavor requiring them to have at least one Ph.D. and a minimum of 30 years experience, not to mention an elaborate computer system that creates models and reports.
Some would have producers believe that portfolios must be constructed using something called the "Monte Carlo" theory to model the probabilities of various outcomes. They say producers need to use umpteen-dozen model portfolios and fund positions and must rebalance continuously. They say they have theories and techniques that simply are beyond the grasp of the common person's mind.
Those tools and qualifications are fine, not to mention good marketing, but investors succeed for reasons other than the adviser's level of perspicacity. They succeed because of a few simple decisions that they make with a wise and conscientious adviser's help. Following are ways producers can help prospects make sound investment decisions.
Accept the appropriate level of risk. In the absence of risk, everyone wants to make as much money as possible. But there is always risk.
The essence of risk is that someone might liquidate his or her investments, either out of a need for money or out of fear, at the worst possible time. The simple solution is not to invest funds that one will need within a certain time frame. The other requirement is to invest in things that, if they go down, probably will not create an intolerable fear.
For example, if a good growth fund goes down 35% in a bear market and one is under no financial pressure to sell, most producers can live with the knowledge that such a fund is likely to recover from the decline, even if it takes three or four years to do so. If a dot.com fund goes down 70% in the same market, the producer isn't sure that it will recover in his lifetime.
Allocate investment assets in accordance with the foregoing understanding. Because the upside potential is so great, the dot.com fund still may have a place in the portfolio. But it might be a 3% to 5% position. The large cap growth fund might be appropriate for 25% of the portfolio.
The ease of investing and breadth of choices that are available mean that an investor can have many funds in the mix, but too many funds will lead to unnecessary overlap and complicated accounting and supervision. Usually, four to six fund positions will do the trick.
For ideas and guidance about which funds to use, the producer can turn to many sources, such as his or her broker/dealer, agency manager, or a publication.
The challenge is not a lack of guidance; it is focus. The producer should try not to listen to too many sources or change his sources too often. He probably should avoid exotica, such as high-yield and option writing funds. They seldom perform as well as their promoters say they will, and the risk isn't worth it.
Likewise, the producer doesn't need multiple fund families and groups. A few broad-based groups will cover the bases and not present him with more information and choices than he has time to absorb. There is little point in scouring the producer's sources to uncover the next super-performing growth fund. The odds are against the producer, and, again, the risk isn't worth it.
On the other hand, for some goals such as growth, the producer might want to leave room for one small high-flyer holding, such as that aforementioned dot.com fund, or a sector fund in a growth industry such as health care.
In addition, the producer should label the entire portfolio to serve as a constant reminder of objectives. As an adviser, he needs only three or four labeled goals, such as "growth" or "growth and income," with a few sub-constraints such as "qualified," "high tax bracket," or "prefers low risk."
Before ever meeting with a prospect, the producer can put together a portfolio's ideal components that fit each goal.
Take action. Investors might resist making decisions. The producer needs to convince them for their own good.
In March 2003, at the nadir of the latest bear market, investors were terrified of equity mutual funds. Convincing them to make a move was hard work. But it turned out to be the best possible time to invest.
That leads to one of the most important behavioral laws by which producers can live: The harder it is to convince investors to invest, the more likely they will be pleased with the outcome.
Don't use dollar-cost averaging in all cases. It will work for the absolutely horrified investor, but it isn't necessary or even advisable in all cases.
While there might be people who never should invest, no one should invest sometimes and not invest at other times. Such a strategy requires an infallible crystal ball.
If the producer knew when to invest and when not to invest, he wouldn't need to work. Investors must understand that concept, and it is easier to convince them of it while conditions are good than to scramble to convince them of it during a declining market.
Give investors what they need. Investors need producers. But they don't need the producer to recommend what already is obvious based on the past year. They don't need a rear-view mirror. They need the producer's objectivity, determination, experience, wisdom, and knowledge.
Investors will benefit from the producer's commitment to a discipline. They are comforted by the producer's friendship. Computers don't supply those qualities. Call-in centers won't help. Newspaper and magazine writers don't know the producer's prospects and their particular needs and personalities. The producer does.
In view of the foregoing points, should equities be part of your business plan in 2005? Has equity investing become too complicated to include in your agenda? Ask your prospects. They probably will say that they are like you and they share your life goals and objectives. They have trust and confidence in you. You are the best person to help them invest. Take action!
