What to Expect From Your Investment Advisor


Question: My investment advisor has my portfolio diversified and that seems to be dragging down my return.  Last year the S&P 500 index was up 13.7% and my portfolio only gained 3.1%.  When I ask him about this he claims that we are on the right track and reminds me to be patient and focus on long-term performance. Is this correct, or should I shop around for someone more aggressive?

Answer: In general, investment advisors should help you match your objectives, goals, and level of risk tolerance with an appropriate investment plan.  Your investment plan should include a portfolio that is allocated among multiple asset classes.  Then every quarter your investment advisor should review the portfolio and suggest changes if necessary.  Changes could be prompted by a need to rebalance because the allocation is out of whack or a change in your investment goals or risk tolerance. 

One of your investment advisor's biggest (and often most difficult) tasks is to manage your expectations.  It’s easy to get caught up in the whirlpool of current market trends and then react irrationally.  The people who do this end up buying high and selling low.  They also will end up always investing in “popular” investments – those that have recently performed very well – without giving much thought to what makes sense. 

As you said, the S&P 500 index gained 13.7% last year. That's a great rate of return, but not something to expect every year.  In fact, the S&P 500 has increased by over 200% since its most recent low on March 9, 2009.  Other asset classes, such as emerging market stocks, international developed market stocks, and commodities had negative returns last year. 

A good investment advisor will continue to reinforce the hard fact that we never know ahead of time which asset class will outperform the others.  We only know after the fact.  So we maintain a diversified portfolio to reduce portfolio volatility and mitigate the risks.  All the while, your diversified portfolio is set to match your objectives --- to achieve an average annual rate of return over many years that is consistent with your goals.

Rob Arnott, founder and Chairman of Research Affiliates, says “Diversification is least wanted when it is most needed: after our core investments have soared, especially if our diversifying investments have faltered.  Human nature conditions us to seek comfort, to want to buy whatever has performed well and to shun whatever has performed badly.  We too easily forget that whatever has performed well is now priced to give us diminished future returns, and whatever has performed badly is priced to give us the potential for better future returns. For this reason, diversification always tests our patience in the late stages of a bull market.”

You should keep your diversified, risk-managed account with your investment advisor.  After a number of years, you will be glad you had the major portion of your assets diversified under his watchful eye and control.  Your investments might be boring, and they may grow slowly, but they will be there when you need them the most.

Kenneth B. Petersen CFP®, EA, MBA, AIFA® is an investment advisor and Principal of Monterey Private Wealth, Inc., a Wealth Management Firm in Monterey.   He welcomes questions that you may have concerning investing, taxes, retirement, or estate planning.  Send your questions to: Ken Petersen, 2340 Garden Road Suite 202, Monterey, CA  93940 or email them to ken@montereypw.com.