[The seemingly endless nearly-13-year bull market has engendered for many financial advisors a growing, uneasy feeling that has been known to develop into a downright anxiety over where to invest clients’ money. This concern can lead some to employ defensive strategies that may drag on performance as equity markets continue their climb. This sets up performance-related questions from clients, and a vicious cycle of investment anxiety continues.
An intriguing series of blog posts I recently read posed interesting perspectives on this important issue of advisor investment anxiety. That is why we reached out to one of the blogs authors and Institute member Jon Robinson, CEO and co-founder of Blueprint Investment Partners—an asset manager with strong opinions and experience in handling this investment dilemma. Given the nature of modern-day investment anxiety, we wanted to explore their insights more fully, which may be helpful in addressing some of the challenges for advisors in the current investment environment.]
Bill Hortz: Given the state of the market over the last few months, what are you hearing from financial advisors?
Jon Robinson: We are hearing a lot of apprehension. Many advisors are experiencing that cliché dilemma where there’s an angel on one shoulder and a devil on the other, each offering conflicting messages.
On one hand, they want to de-risk their portfolios now because their gut says the bull market has lasted too long and a large drawdown or crash is imminent. On the other hand, they recognize that in de-risking, murmurs about “irrational exuberance” become clamors, usually having a disastrous impact on upside capture.
Advisors are in a tough spot. How do they participate in the upside but keep an eye on the downside? After nearly 13 years of substantial gains, how do they move into more defensive strategies without triggering taxable events? Those are some of the questions constantly coming up in our conversations.
The first question is particularly salient for advisors who have money they need to put to work. We’ve heard from advisors who are sitting on as much as 50% cash, uncertain about where to allocate it right now because they sense the stock market party may be winding down.
Hortz: What has your research shown as a solution to some of these concerns?
Robinson: Human emotion is the common thread among everything I just spoke about – anxiety, apprehension, “gut” feelings, exuberance, uncertainty. We think human emotion is the biggest obstacle to successful investing.
So, I think the best question to ask is this: How do you remove human emotion from investment decision making?
Blueprint is resolute in our answer: Advisors need a rules-based process that will dictate their response to various market environments. They need a system that does the decision making for them by pre-determining when and where to enter the market and when and where to exit.
If you agree with that philosophy, then it means how advisors have historically constructed portfolios is all wrong. Too many have focused on what goes into the portfolio rather than scrutinizing the systems that will direct portfolio decisions.
Here’s a specific example: Buy and hold is technically a system. But a lousy one! If you’re a client about to retire, you simply cannot take a 50% drawdown. In our view, a system like trend following is more suitable because it can capture upside when an asset class is climbing, but it also quickly pivots when conditions change to protect against potentially catastrophic downside losses.