Investing Successfully is Really Hard

Research 7.17

My newest column for Research on Wealth magazine is now available. I hope that you will read it as well as the entire issue. The conclusion follows.

“Investing successfully is really hard. Even great investing is really hard to abide. But if you avoid stocks or do not find a way to abide stock market volatility, it will be really, really hard for you to meet your financial goals.”

Investing Successfully is Really Hard


I Hope This Doesn’t Describe You

The new issue of Research magazine is now available online. Its theme is evidence-based investing. I encourage you to read it in its entirety. My contribution is here and outlines some alternatives to evidence-based investing. A taste follows.

The providence-based advisor

An advisor who lacks convincing evidence will often claim that the advice he is giving comes straight from God. Sometimes the claim is implicit, sometimes explicit.

Sometimes the motivator is guilt, sometimes it alleged brotherhood. But the results are usually hellish.

I Hope This Doesn’t Describe You


For those of you unwilling to register (it’s free), the full text is reproduced below.


There is a new and growing movement in our industry toward so-called evidence-based investing, which has much in common with evidence-based medicine. Given that it’s a relatively new concept — even though the best advisors have always practiced it — it might be helpful to look carefully at some possible alternatives to being an evidence-based advisor.

Here is a baker’s dozen worth of options for your thoughtful consideration. Many were adapted liberally from a piece on evidence-based medicine written by Dr. David Isaacs and Dr. Dominic Fitzgerald for the “British Medical Journal” in 1999. If I’ve missed any category, please let me know.

The eminence-based advisor

This (usually older) advisor wants you to believe that the more senior the practitioner, the less importance needs to be placed on anything so trivial as mere evidence. Apparent experience, it seems, is worth more than any amount of evidence.

These advisors have a touching faith in personal experience, which can be defined as “making the same mistakes with increasing confidence over an impressive number of years.” Such an advisor’s white hair and balding pate are often called the “halo” effect and act to trump substantive knowledge.

His (rarely her) well-appointed suite of offices featuring fine views and paneled wood are usually seen as the best available evidence of quality.

The fear-based advisor

This sort of advisor keeps on shouting from the rooftops that “the end is nigh,” over and over and over again, no matter what actually happens, in order to get you to respond. The idea is that if clients and prospects are sufficiently scared, they will run to the fear-monger for refuge. In other words, quite simply, fear sells.

The crooked advisor

This category of advisor is both self-explanatory and far bigger than generally assumed. For these advisors, prospects and clients are merely opportunities to be exploited by the best available means. They actually do care about evidence, but it’s a very different sort of monetary evidence (cha-ching).

The vehemence-based advisor

This sort of advisor sets out to substitute volume and passion of transmission for actual evidence so as to pummel, cajole and harass prospects, clients and adversaries into believing that he (rarely she) is really good.

The eloquence-based advisor

Proponents of this approach are always smoooooth. They feature year-round tans (even in New York), power ties, fine suits from Barneys, and (especially) a silken tongue. Sartorial elegance and verbal eloquence are deemed powerful substitutes for mere evidence.

The novelty-based advisor

This specimen emphasizes what’s new and unique, the less transparent the better. They always have the latest and the greatest.

Black boxes and hedge funds are prominent in this space — because he (again, rarely she, as is true in most other advisor categories) is so smart, don’t cha know?

The providence-based advisor

An advisor who lacks convincing evidence will often claim that the advice he is giving comes straight from God. Sometimes the claim is implicit, sometimes explicit.

Sometimes the motivator is guilt, sometimes it alleged brotherhood. But the results are usually hellish.

The intuitive advisor

Alleged common sense is often more attractive than real evidence, especially because good investing is often counter-intuitive. Therefore, this sort of advisor will go with his gut about stocks, funds, managers, styles, timing and forecasts.

He will rarely just stand there. He’ll usually be doing something.

The diffidence-based advisor

Some advisors see a problem and look for an answer. Others merely see a problem. The diffident advisor will often do little or even nothing out of a sense of paralysis or despair.

He will do nothing, because he has no good evidence-based idea what to do. This, of course, is most often better than doing a non-evidenced series of somethings. But that’s a really low bar.

The self-righteous advisor

This advisor hoses his clients while remaining utterly convinced that they are doing what’s best for them. He’s often wrong but never in doubt.

No one should be surprised that, in this instance (as well as others), “what’s best” is often really, really good for the advisor. It doesn’t usually work out so well for the clients.

The nervous advisor

Fear of clients being upset and the potential consequences thereof are powerful stimuli for excessive and repeated portfolio changes. Counterintuitively, this sort of advisor is often quite afraid of offering reasonable expectations, because unreasonable expectations are so much more attractive. Plus, they can be counted on to tell clients and prospects what they want to hear rather than what they need to know.

The ideology-based advisor

This sort of advisor is unalterably committed to his market ideology, contrary facts and evidence notwithstanding. They know what’s True (with a capital T) and will stick with that come hell or high water (and beyond).

The publicity based advisor

This category sets out to convince clients of his bona fides via media appearances, publicity shots and name recognition rather than real client service. That’s because he had to become so well known for a reason, right?

As British journalist Robin Powell puts it, “All too often we base our investment decisions on industry marketing and advertising or on what we read and hear in the media” or on something else altogether.

Evidence-based investing is the idea that no investment advice should be given unless and until it is adequately supported by good evidence. Thus, evidence-based financial advice involves life-long, self-directed learning and faithfully caring for client needs.

It requires good information and solutions that are well supported by good (often academic) research, as well as the demonstrated ability of the proffered solutions to work in the real world over the long haul (which is why I would prefer to describe this approach as science-based investing). It means changing one’s mind, approach and strategy when the evidence demands it.

The obvious response to the question about whether one’s financial advice ought to be evidence-based is, “Duh!” Then again, advisors and investors of every sort — those with a good process, a bad process, a questionable process, an iffy process, an ad hoc process, a debatable process, a speculative process, a delusional process, or no process at all — all think that they are evidence-based practitioners already.

They may not describe it that way specifically. But they all tend to think that their process is a good one based upon good reasons. Nothing to see here. Move right along.

But the bald fact remains that all too few in the financial world practice evidence-based investing. Take a good look at the alternatives and carefully consider how evidence-based your advice and your practice really are. Test and re-test your purported evidence for errors, holes and unsupported conclusions.

Investing successfully is really hard. Adding a client component makes it harder still. Even the best advisors are going to be wrong far more often than they would like.

If you want to do right by your clients, keep checking and re-checking your work, your assumptions and your conclusions. The evidence demands no less.

The Fiduciary Standard Is Far From Enough


My April Research magazine column is now available online. Here’s a taste.

To repeat my assertion from last month’s column, proper financial advisor priorities begin with a recognition of what is important and what is achievable. Clients and prospects routinely have unreasonable expectations. But they are just as routinely egged on by financial advisors whose own claims and expectations are just as outlandish. The outrageously silly expectations of the consultants described above make the point beyond dispute.

No matter what the DOL and the SEC choose to do or not do in this regard, true success for both advisor and client will require carefully and truly doing the right thing, even when the client doesn’t see it that way. Doing so demands not just a higher standard of care, but also a much higher standard of practice. It should be axiomatic that a higher practice standard will require much higher training and educational standards. Fiduciary standards won’t hurt in that regard, but they aren’t nearly enough either.

I hope you’ll read it all.

The Fiduciary Standard Is Far From Enough

Fixing the Advisory Crisis of Confidence

Hedge Funds 3The digital version of my latest Research magazine column is now available. I hope you will give it a read. Here’s a quick snippet.

Good financial advice is both invaluable and rare. It requires far more than selecting investments. It requires substantial expertise and the ability to manage emotions and expectations. We shouldn’t ever be afraid of saying so and we should never shy away from providing the kinds of service that will demonstrate it beyond doubt.

Fixing the Advisory Crisis of Confidence

Cool News

NEAL_MedallionThe Jesse H. Neal Awards were created in 1955 to recognize and reward editorial excellence in business publications. Unbeknownst to me, ALM (publisher of Research magazine, for which I write a regular column) nominated me in the Best Commentary category using three of my columns (see below). My editor now tells me that I have been named a finalist. I am deeply honored. Other finalists include CIO, Investment News, and Crain’s. The awards ceremony is April 1 in NYC.

The three submitted and thus nominated columns are linked below. I hope you will read them (or read them again).

Investment Advice That Will Pass Time’s Test

The January issue of Research magazine is now available onxx-investment-advice-test-of-time-res-0116-aboveth73-resize-600x338-line and, with it, my Above the Market column. Here’s a taste of the column.

We all want “high leverage” ideas — the ideas that will make the biggest impact on our portfolios and our lives. But the best ideas available are not still more investment recommendations about hot sectors, hot funds, hot strategies and hot managers. There is no reason to think anybody can do that anyway.

The best ideas I can offer relate to our besetting mistakes, mistakes we make over and over again. My high leverage idea for 2016 and beyond is to get off the merry-go-round of the next new thing and to eliminate obvious mistakes first and foremost. As Charley Ellis famously established, investing is a loser’s game much of the time, with outcomes dominated by luck rather than skill and high transaction costs. Thus if we avoid mistakes we will generally win.

To paraphrase the philosopher Immanuel Kant, the first task of reason is to recognize its limitations. Every rational person acknowledges having made many errors. Even so, nobody offers current examples. We all want to think that our mistakes are in the past, that we’ve learned from them and that now we’ve set things right.

We desperately want to believe that our new approach, new strategy or new portfolio will — finally — be the magic elixir that will make us very good, if not great, investors (or at least that we can find those great investors).

I hope you will read the entire piece and the full issue.

Investment Advice That Will Pass Time’s Test

The Advice Business: Make It Personal

res-1015-coverThe October edition of Research magazine is now out and it once again carries my regular column. I hope you will read it and the entire issue. Here’s a quick taste.

We should give our best advice as convincingly and as comprehensively as possible. Yet best practices aren’t always followed. A stellar advisor will recognize when the case for the best approach is lost (but won’t give up too soon) and move on to offer an acceptable alternative. Significantly, a perfect approach, portfolio or product is useless if and when the client refuses to use it or — crucially — stick with it when the going gets rough or when something else comes along. “Pretty good” beats “not at all.”

The Advice Business: Make It Personal

A Musical Lesson for Investors and Advisors

res-0815-annuityanalytics-mi600-resize-600x338The August edition of Research magazine is now out and my column is now available online and is linked below. Here’s a taste.

Sometimes near Christmas Phil would slip out of Avery Fisher Hall after a performance with the Philharmonic, change jackets, and join some Army brass in front of a kettle. He didn’t hear “Bravo!” there. In that context, people who had just paid a lot of money to applaud his virtuosity would routinely ignore him and his music. It was as if he was hiding in plain sight.

In nearly every context and situation, we routinely hear, see and perceive exactly what we expect. No more and no less. Since concertgoers (or more precisely, concert-leavers) didn’t expect a world-class performer to be playing with the Salvation Army on a street corner for free, they didn’t notice when one was doing just that.

I hope you’ll read the whole thing.

A Musical Lesson for Investors and Advisors

The Age of Financial Secrecy Is Ending

res-0515-coverThe May edition of Research magazine is now available online. My monthly column is available here. A taste follows. I hope you’ll read it and the entire magazine.

In the financial services industry, there is precious little that ought to remain secret. Instead of trying to maintain the self-serving secrecy that has dominated our industry for so long, especially because such secrets will keep getting exposed sooner and sooner, the key to our longer-term survival will be to remake who we are and what we do to serve clients in a transparent future. That will mean true transparency—not the faux-transparency (think “disclosure”) our industry uses to protect its own interests. It will mean clearly and fully articulating what we do and why there are (data-based) reasons to think we can accomplish what ought to be accomplished. It will mean an honest appraisal of our fees and their justification. It will mean serving our clients’ interests instead of our own. It will mean more truth-telling and less sales pitch.

The Age of Financial Secrecy is Ending

The Right Hedge for Retirement

res1114coverMy November column for Research magazine came in the mail today with the rest of a typically fine publication and went live on-line too. Here’s a taste.

The great fear of every retiree is running out of money. Guaranteed income via Social Security, defined benefit plan and annuity contract is by far the safest means to provide retirement income that one can’t outlive. Therefore, prospective retirees with insufficient Social Security and pension income would do well to consider the benefits of hedging their retirement investment risks via annuity contract.

One can readily and reasonably argue about how much guaranteed income a retiree ought to have, the extent of inflation protection that’s necessary and appropriate, how much one should pay for such protection, and how to balance the costs and tradeoffs (particularly relating to control and legacy) that annuities require. These issues require careful analysis and thoughtful consideration by prospective retirees, their families and their advisors.

But one cannot reasonably argue that annuities don’t do precisely what they are designed to do. They provide guaranteed retirement income that one cannot outlive. A retiree with more guaranteed income has less risk of financial disaster than one with less guaranteed income. Economists routinely sing the praises of annuities as does the federal government’s General Accountability Office. Guaranteed income offers retirees the great retirement hedge. Annuities do what they are supposed to do.

I hope you will read the full article as well as the entire magazine.

The Right Hedge for Retirement