21 Apr 2017 Confessions of a Former Active Manager

Just yesterday, following a conversation with a client, I experienced an all too familiar tug, not unlike the one an alcoholic might feel at a cocktail party, when the smell of alcohol is rich in the air and that drink is but an order away. During our conversation I learned that Amazon AMZN was now up 21% for the year so far. The broad stock market is up 5.7% by comparison.

In an earlier life, I was a highly active trader/investor concentrating in fast-moving, high-flying technology stocks just like and including Amazon. It was an extraordinary time, filled with exciting research into the possibilities of new discoveries, disruptions and applications that would make our lives better and my clients richer. The returns were ‘fast and furious,’ to borrow a phrase. They were, intoxicating.

But by 2000, the music abruptly stopped and the party came to a crashing halt. The NASDAQ market index, home to most technology companies fell over 70%, before bottoming out. It would take a full 15 years for prices to return to their pre-crash levels.

In the years following that crash I witnessed and participated in the perils of allowing ‘animal spirits*’ to drive investment decisions of retirement-purposed assets. The latin spiritus animalis goes back to 300 BC, and refers to ‘the spirit (or fluid) that drives human thought, feeling, and action’ as cited in Wikipedia.

With few exceptions, a predictable process occurs in most of us where stocks are concerned: As prices rise, our confidence in the course we have set rises as well, even as uncertainty rises. When the party ends, as it invariably does, lifetime savings can be devastated, often chasing many from the benefits of capital-market investing for good.

For the past 12 years, as a ‘reformed advisor’ I have worked individually with my clients and corporately at Beacon, using an integrated approach of planning and investing, with the idea that confidently achieving lifetime goals is of far greater value than demonstrating flashy returns. Achieving higher returns cannot be accomplished without realizing higher expenses, taxes, and volatility. All of these forces create drag or inefficiencies that detract from goals achievement.

For the past 12 years, Beacon has provided an efficient investing process that efficiently delivers market returns without risking under-performance. The evidence of the effectiveness of such an approach in funding long term goals was not so plentiful 12 years ago, but it’s hard to escape it today.

A study released last week by S&P revealed that over the past 15 years, ended December 2016, a full 82% of mutual funds underperformed their benchmarks. And even those funds that do outperform their benchmarks do not sustain their outperformance year after year.

But facts like the ones just mentioned and knowing you have confidence of reaching way-off goals dont’t tend to excite our animal spirits the way a 21% 3-month return in Amazon does. But experience has taught this advisor, the hard way, that chasing wild animals is perilous because there’s no way to know when they will turn on you – and they will – they always do. One of the main reasons Beacon exists is to help our clients avoid the distractions and temptations that can so easily divert them from reaching their highest aspirations.

*Animal Spirits is a term that was used by economist John Maynard Keynes to explain why our human nature can push us toward irrational decisions, even in times of uncertainty.