SCOTT REED: Trust and verify is sound strategy

By Scott Reed

I had a response to my last column on investing for the long-term from a reader who was concerned by the “buy it and forget about it” style of investing.
If you read that column you could certainly see how he might think that I suggest that strategy. This would be a good time to set the record straight and also to continue to build on this idea of developing a sound investment process.
First of all, let me address one of his concerns. He said he had bought stock in both WorldCom and Enron, thinking those would be long-term investments. Those investments didn’t work out so well. The fact is that we can’t do much about investing in companies that will lie to us about their financials.
It is devastating for the investors who had, for the most part, made good decisions when they invested and continued to make good decisions all the way up to when they found out they were being lied to. Unfortunately, that is almost always too late.
The only comfort is knowing the people who lied aren’t fairing so well either. The Bernies – Ebbers and Madoff – are in jail. Ken Lay is dead. And Allen Stanford isn’t looking so good at the moment.
Investing in individual stocks of companies that lie to you is hard to protect against. Investing with firms that are lying to you is easier to protect against. Don’t let the firm providing investment advice also custody or hold your assets. In the case of Stanford, those clients who custodied their assets away from Stanford, for the most part, were able to recover their assets. Those who let Stanford hold their assets did not do so well.
I want to address this idea of “buy it and forget about it.” I am in favor of investors managing the big picture. I did write that investors should spend more time on their own job and less micro-managing their investments. That doesn’t mean you should just forget about what is happening in your portfolio.
Ronald Reagan made famous the term “Trust and verify.” I think that is the right way to oversee your portfolio. Find someone you trust. Make sure he has the expertise to do what you are asking. Put him to work and then make sure you have an oversight process in place that keeps you in the loop on everything that is happening in your portfolio. Never forget about it. This is your income stream when you retire. You have a right and a responsibility to know what is going on.
The best oversight process is one that is understood by everyone at the beginning of the relationship. Put together a plan that states how often you want to be informed and how you are to be informed at those meetings. I recommend no less than once a year and no more than four times a year.
That recommendation doesn’t mean you should not call your adviser if you need to address something in between meetings. It simply means that everything will be reviewed on a regular interval. Then agree on what kind of information to expect at those meetings. Are you looking at Morningstar ratings of certain research departments? Will there be certain ratios used like Sharp, Beta, etc.? What index will be used as a measure of how your investments are doing?
Once you get that in place, you are ready to go. You can be very involved in your investment process without being in charge of every detail. Trust and verify. It is a system that works.
Scott Reed is CEO of Hardy Reed in Tupelo.