One Person’s Mistake is Another’s Lesson

In a Premier Consultant meeting on Tuesday, January 29, it was time to look at what happened, how we reacted to the Financial Melt Down and the results. A comment from John Payne, veteran Advisor at Houston Asset Management, says it all. He said what every man and one female were thinking; “Will we ever learn?”

On September 15, 2008, Americans started an emotional roller coaster ride, the likes of which we had never experienced in our lifetime. For me, Chief Investment Advisor and Premier Consultant to Mid Tier Millionaires, it appeared in the form of a zip line domino effect. As a 22 year Financial Veteran, it is the only way I can describe the emotion and my own personal experience. Visualize a calendar; it is Monday, September 15th and you hear the startling news ‘Lehman fell’. From then on it appeared in my mind as if dominoes were falling as fast as a zip line… it was zip, zip, zip, zip each week with seemingly no end in sight. It was pure panic. It was shocking, unbelievable and hard to grasp. The doom and gloom was everywhere. “Get out, get out, get out!” was SHOUTED by talk radio hosts.

Experts were being interviewed, saying go to cash, lectures were being held with 800 plus in attendance given by experts predicting the market would fall to 3500, 5500 – get out. Insurance agents were running ads of guarantee of principal that was assured to protect you – get out. Ads started popping up all over TV and radio that Gold would save you – get out. Were they right? Could they be? Then TARP would save the day. Even in this crisis the Government acted as usual; instead of tending to the crisis, they took full advantage and loaded up with Pork. At the time, I wrote to my clients, “this is important and must be done, but with the delay, what price with they make us pay?” I was referring to the pork. What did we get two weeks later; massive pork the likes we have never seen. So disappointing – but expected.

It is customary for me to provide a Quarterly Outlook for my clients. During this crisis, there was so much “noise”, it was mandatory to send out emails daily. Most of the time, misinformation, scare tactics and half truths were everywhere. It was not uncommon for me to send out emails first thing in the morning for what was being reported the previous night, then again around 1:00 for what was being reported that morning and then once again that evening for what was being reported between 1:00 p.m. and 7:00 p.m. These emails were bullet points, or short explanations, in plain English about what people were hearing on the news letting them know how it affected each of them. That was what made this “different”. My fear was this was MORE information overload. In my Client Advisory Board meeting, the first thing I asked was “is this too much information?” The answer I received reassured me; “No! The emails allow me to understand all that I hear and allows me to go take care of my business, my family, do my job, take care of my kids, my ailing parents, continue my charitable works, etc., knowing I will get clarification about the news I hear all day.”

For eighteen months, I felt like a dog digging furiously for a bone hidden in the back yard – anything I could find to give people reassurance. I was expecting to give people hope, but hope is neither a plan nor an investment strategy. You see, an Advisors main responsibility, after all the proper Financial Planning, is to ensure people understand the rebalancing and monitoring and stick to their plans, if the plan is solid. With this said, I could not find anything “to do”. It is human nature to want to “do something” and “take action”. All review processes include monitoring, rebalancing and firing those strategists that veer from the purpose as you initially hired them during a time of blue skies, sunshine and a strong breeze. But major shifts? During a Financial Melt Down? Going to cash, buying an Annuity after the fact, going to gold, selling out and buying Real Estate – nothing could justify any of these options.

What was confirmed – the contrarian theory; Whatever the Masses are Doing, Do the Exact Opposite.

Case in point; in 2008 when the S&P 500 dropped -37%, Preservation Strategy reported a drop of only -4.7% (net of management fees). When in 2009 new money invested into the Genworth Financial Wealth Management platform was reported to be $4,400,000,000 and 43% was allocated to Preservation Strategy. If you had started 2009 with 10-20% of your portfolio allocated to Preservation Strategy, that portion of your Portfolio would have had a return of +6.32% for the year (net of fees). If your portfolio was repositioned 100% to Preservation Strategy, your return was +0.82%. If you had diversified properly before the crisis depending on your Risk Tolerance, you would have had 23.99% return in a Moderate Growth Profile. If you added investable assets to what was at its lowest I have seen reported, 46.26% return.

And, as reminded by my friend and Premier Consultant John Payne, “in 2008, eleven of the twelve major investment categories had negative returns. Only one other time in the last 100 years has that happened. It was in 1932 at the bottom of the Depression. Articles came out in the first quarter of 2009 stating that, ‘Asset Allocation is dead’ and that ‘It is different this time’. No it is not. Asset Allocation was back with a vengeance in 2009 and it worked. I would rather put my faith in the 98 years out of the last 100 where asset allocation worked and not in the 2 where it did not.”

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