Lessons learned: Advisors reflect on 2003

(December 23, 2003) The year 2003 finally brought some glad tidings for investors, with the markets staging an impressive rally. But confidence remains fragile and some clients still haven’t learned their bear market lessons, advisors say, and are still either shunning opportunities or chasing hot performers.

Advisor.ca contacted several advisors and industry experts, asking for their thoughts on the past year.

“In my opinion, the most significant lesson is to learn from your mistakes,” says Brad Brain, a financial planner with Berkshire in Fort St. John, B.C. “Unfortunately, many investors haven’t got that message yet, and the mistakes that have haunted investors for centuries are still being made today.

“Investment behaviour is not driven by rational thought, but by fear and greed,” Brain believes. “People can parrot ‘buy low, sell high’ from now until the next ice age, but they will still buy tech stocks in 1999, and they will sell quality investments in 2003.”

“It’s easier to get a Jack Russell terrier off of an investor’s leg than to get him to part with an investment that has risen 50%,” says Allan Johnson of Money Concepts in Prince George, B.C. “Go figure. These are the challenges facing every advisor who is continually trying to get their clients to do the right thing at the right time.”

Stick to investment fundamentals, Brain advises. “Buy quality investments at good prices and hold them for the long term, understand what you own and why, dollar-cost averaging, diversified portfolios, all the stuff that seemed passé back in 1999. The more things change, the more they stay the same.”

Independent fund industry analyst Dan Hallett agrees that for most investors, market-timing decisions are imprudent. “It’s one thing to be concerned about valuations and choosing to buy cheap stocks as a way to control risk while maintaining market exposure,” he says. “It’s quite another to invest entire portfolios into bonds and income trusts at the expense of most other classes.”

The past few years also offered some perspective on risk tolerance. Brain says many Canadians who honestly considered themselves to be long-term investors could really only handle modest volatility in their portfolio.

“More people than ever now have first-hand experience that markets can go down as well as up,” says Fred Smith of Raymond James in Saskatoon. “If you weren’t willing to buy when the Dow was 7,500, why buy when it’s 30% higher at 10,000? If you can’t handle the ups and downs, stay out of the market.”

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Investors who enjoyed positive performances in their portfolios in 2003 likely ignored the short-term, media-driven messages of doom and gloom, says John Hope of Allied Financial Services in London, Ontario. “They had confidence in their long-term strategies and were educated about the cycles that markets and asset classes experience,” Hope says. “Most likely they worked with an advisor who provided them with the tools and support necessary to enjoy this success.”

Looking ahead, Brain says he’s optimistic that 2004 will be an even better year. “After all, some good quality stuff has come down in price,” he says. However, Brain says he is concerned about the possibility of rising interest rates and the large trade and budget deficits in the U.S.

Hope proposes that 2004 should be the year that investors “go to school” on the value of professional financial advice. “This is not a matter of credentials; it is a matter of sound investment philosophy, personal integrity and always putting the client’s interests first.”

“The opportunity for advisors is to take the negative returns and industry media reports and turn them into a business-building opportunity,” Hallett says. “The idea of better documentation, greater transparency, and bringing a truly disciplined process to the table has got to have a positive impact in an environment where confidence in the system is being challenged.”

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Share your thoughts about the past year with your fellow advisors in the Talvest Town Hall on Advisor.ca.

Filed by Doug Watt, Advisor.ca, doug.watt@advisor.rogers.com

(12/23/03)

Doug Watt