By RICK FERRI
I’ve been managing my parents’ investment portfolio for 20 years. It’s not complicated. Their money is split evenly between two broad market index funds; a total US stock index fund and an intermediate-term corporate bond index fund. That’s as simple as it gets, and it has worked wonderfully.
My 86-year-old mother wears the financial pants in the family and makes all the money decisions. Mom called out of the blue a while back to complain about her wonderful portfolio.
“Our return isn’t doing well,” she said.
“Mom, why the sudden concern about how your portfolio is performing? You’ve owned the same two index funds for 20 years and never had a problem.”
“Rick, I know, I know. Listen to me. I’ve been watching these two funds for the past few years. One fund does much better than the other, and it always seems to do better. I just think it’s silly to have half our money in a fund that’s not doing well. Let’s put all the money in the stock fund.”
Ah! This was a classic case of fixating on one investment rather than the entire pot of money. It was time to have another talk with her about the basics. This talk was needed every ten years or so when stocks were either doing very well or very poorly.
“Mom, you know stocks don’t always go up. There are long periods when they perform poorly. You remember 1987, 2001, and 2008?
“I know, I know,” she said, then added those dreadful words, “This time it’s different.”
Augh! This is going to take longer than I thought. After more explaining and reasoning, and more pushback from Mom, she finally acquiesced, but not because of my brilliance in investment advising.
“Ok, Rick. This money is going to you and your sister anyway, so do what you think is best.”
And there you have it — why prolonged bull markets (and sudden bear markets) are dangerous. Ten years of great stock returns (and a year or so of really bad stock returns) turns my mother into an “inadvertent market-timer”. At age 86, bless her soul, Mom has decided that bonds don’t cut it anymore and stocks are the place to be. So, we needed to have “the talk”, and we’ll have it again after the next bear market hits, or the stock market doubles again.
Joe Kennedy was the father of former president John F. Kennedy. He made millions in the stock market in the roaring 20s and got out before the Great Depression. How did he know? According to Fortune magazine, “Taxi drivers told you what to buy. The shoeshine boy could give you a summary of the day’s financial news as he worked with rag and polish. An old beggar who regularly patrolled the street in front of my office now gave me tips and, I suppose, spent the money I and others gave him in the market. My cook had a brokerage account and followed the ticker closely. Her paper profits were quickly blown away in the gale of 1929.”
I have no idea where the stock market is going, but I do know people have a tendency to extrapolate into the future what just happened in the past, and that makes them susceptible to inadvertent market timing. I also know inadvertent market timing ends badly when the trend reverses. My advice to Mom and to all investors is to stick with your long-term plan. As John Bogle would say, “Stay the course!”
My mother hasn’t brought up their portfolio in a while, but I know she’s looking at it! So far I haven’t been fired as the family investment adviser. Even if that happens, she can’t fire me as her son… Or can she?
Rick Ferri is CEO of Ferri Investment Solutions.