SCOTT REED: Investment advisers should keep you from hurting yourself

By Scott Reed

There is an old saying that the only two things in life that are sure are death and taxes. I would add one more item: “The house always wins.”
Most gamblers I know claim to win almost all the time. I don’t believe them.
The same seems to be true with investments. Everyone wants to do better than the Dow Jones, the S&P 500 or some other index. Everyone wants to know that they are beating someone.
Studies done year after year over the past three decades will dispute that many investors beat the averages.
It’s not that the average investor doesn’t know what to buy; it is that they don’t know how to act once they buy something.
Investing is an activity that is best done in the absence of emotion. The problem is that emotions abound for the investor.
First of all, they are investing their hard-earned money. Seeing it change in value is emotional. Emotionally satisfying when it is up and dissatisfying when it is down. All of the forces that push you to make bad decisions are at work in the investment decision making process.
So what does the smart investor do? If they can’t seem to do it on their own, they hire someone to help them.
I have been in thousands of meetings with potential clients. I can tell you what they want to know first and foremost. They want to know how you plan to beat the market. They want to know what secret you have that will make their portfolio outperform the Dow, the S&P 500, their neighbor, their brother and their co-worker.
I also know what a lot of investment professionals do at that point. They show the client a portfolio that, if invested 10 years ago, would have significantly beat whatever index or co-worker you would like to beat.
It’s not hard to come up with a portfolio like that because you are using past performance to make your case.
Hindsight is 20/20. There is little chance that your investment professional will be as good looking forward 10 years as he/she is at looking backward.
He/she can figure out what used to work but that doesn’t really help you achieve your goal. You have to ask yourself, “What qualities would an investment professional have that can help me achieve my goals?”
It seems to me that what you want out of an investment professional, what you need more than anything, is someone who can stop you from hurting yourself over and over again. There is a reason why the Dalbar Co. has put out report after report that shows the individual investor significantly underperforming the markets. It is because, even with an all-star lineup of investments, they still manage to buy and sell those investments at the wrong time over and over again.
What you really need is someone who has the character, the ethics, the intelligence, the knowledge and the communication skills to get you out of investments when you are greedy and want to stay in, and get you into investments when you are scared and want to run away.
Don’t ask perspective advisors about how they plan to beat the markets. Ask them how they plan to stop you from blowing up your own portfolio when greed and fear are begging you to do the wrong thing. That is the true value of an investment professional.
Scott Reed is CEO of investment advisory firm Hardy Reed in Tupelo. Contact him at (662) 823-4722 or sreed@hardyreed.com.