And to reiterate a simile used earlier, Ritholtz asked why do investors tend to underperform? “It’s not the market crashes that get them, it’s the cholesterol and the high blood pressure,” he said. “It’s the high fees; it’s a lack of discipline; it’s not sticking to a plan; it’s the trading incessantly; and their investment philosophy is all over the place. They make emotional decisions.
“You have a big advantage over the individual investor in that you’re all part of organizations that can help them manage risks and deliver better performance to clients,” he added in his comments to a room full of financial advisors and money managers.
He told the audience they can provide organizational alpha through their size and ability to negotiate fees, along with having long-term investment horizons, the ability to rebalance portfolios when assets classes go up and down, maintaining a consistent investment philosophy, and having a process in place.
“We have to understand the war between ourselves and our brain,” Ritholtz concluded. “We have to recognize how important risk is in achieving returns, and we have to embrace the appropriate levels of risk. If a client says to you they can’t deal with 20 percent drawdowns, then they shouldn’t be in equities.”