As year-end nears, it may be an appropriate time, while evaluating portfolio performance, also to put in perspective portfolio returns that include the value added by having a financial adviser. This is not meant to be a self-serving topic! But rather spurred by an excellent article forwarded by a long-time client, highlighting:
- short-term portfolio decisions
- short-term & long-term portfolio performance
- overall long-term planning value resulting from each short-term choice.
Please allow me to expand on the article*.
An informed client wrote in to a “seeking advice” website that her adviser, for long-term risk management reasons, had sold a bunch of Nvidia (NVDA) stock which then appreciated by $50,000. The decision by the adviser was based on the client’s established, stated long-term goals and risk tolerance (desire for balanced risks) and with the client’s best interests in mind. The client overall trusts and likes the adviser and was wanting validation that it was “OK” to have sacrificed such a large gain in return for overall solid and holistic (read: big-picture analysis) financial planning.
The article is striking because this situation could happen to anyone. As an adviser, this situation has happened to me. In evaluating concentrated company stock positions – whether a long-time “dud” which then appreciates, a high-flier or solid long-term gainer – reducing or selling off positions can look like “lost gains” in hindsight. But as with the client in the article, the situation can go either way: concentrated risks can lead to large losses which require a reduction in lifestyle (the NVDA could not have been sold and gone down $50,000 – a real possibility), OR concentrated risks can pay off in the long-term. Timing is the wild card – and the smartest investors and money managers will admit timing is impossible to predict.
This situation highlights a key concept: the behavioral side of investing. Behavior, psychology and the “sleep at night factor” all are central to any real financial planning relationship.
Critically important are the “other” returns of a portfolio in addition to performance. These critical factors include:
- Trust between client and adviser
- Competence of the adviser
- Ability to listen and communicate
- Context of a financial life within a financial plan
- Reasons a financial adviser was hired in the first place
- Eye on the future – goals, dreams and preferences.
Yes, the “missed” $50,000 in the NVDA example can sting or seem like a loss. But possibly not, when looked at with perspective: What became of the proceeds of the original sale? Were the proceeds invested well and did a portion of the proceeds provide peace of mind? Was progress made toward another important life goal? Did the experience lead to a stronger relationship between the client and adviser?
In the age of AI and cryptocurrency with fast gains being made in places, there will be plenty more examples of “missed opportunities” impossible to time. The biggest opportunity often missed is being on track for the long-term, financially, and emotionally. Return on investment includes being on track to achieve goals and maintain lifestyle. A solid awareness of this last factor needs to be part of the bigger – and truly valuable – real-life financial planning conversation.
This material has been prepared for informational purposes only and is not intended to provide, and should not be relied upon for, tax, legal or accounting advice.