Bailout Plan - No, not the one you think

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Oct 8, 2008 8:28 pm

Ever ask your client what their bailout plan is (i.e. loss threshold)?  Like for example, how much of their portfolio would they be willing to lose before they bail out of equities to cash?

Oct 8, 2008 9:15 pm

Our clients I believe want us to tell them that. They trust us to know when to get them out. Problem is if we are a buy and hold advisor we won't be getting them out. You have to be strong enough mentally to handle the job of sticking with the plan that you sold your client. If you can't do that then you have no business advising. I don't mean that as a personal attack it's just the truth.

Oct 8, 2008 11:30 pm

I know that we take into account their time horizon and investment objectives.  But, sometimes these change.  Sometimes though, they're the ones who surprise me.  I offer them a negative return threshold of 12% and they tell me that they won't mind going as far down as 20%.   I like these kind of clients.

In this market though, it's tough.  It's like a bottomless pit.  So, yeah, it's best to just hang in there if you're already in it.  It'll recover anyways right.  Right?

Oct 8, 2008 11:36 pm

Right...just can't tell you when...

Oct 9, 2008 8:14 am

1) Part of the problem is that when someone is investing when times are good, they grossly overstate their risk tolerance.

 
2)If someone has a threshold at which they will bail, we need to make sure that are invested from the beginning in a way that won't allow them to ever hit that threshold.   The average invesor does pretty poorly over time due to this natural inclination to bail when times get bad. 
 
Didn't you guys expect stocks to take a gigantic tumble?  I did.  I warned all of my clients.   I didn't know the reason or the timing of the market decline.  I couldn't even predict the decade.  It's just a fact that markets will go through terrible times, thus, I promise all of my clients that there will be periods that they lose significant amounts of money.
 
Investors have two choices that will yield positive long term results.  1) Don't get in the market.  2) Get in the market and stay in the market (to the extent allowable by one's risk tolerance and time horizon).   If an investor is going to get out because of terrible times, they should have never been in the market in the first place.
 
Gregoron, your clients are doomed to underperform.  Let's say that you have a client that is going to get out when the market drops 15%.  What happens when the market does this?  Your client bails out and moves to cash.    From here, the market is going to do one of two things.  1) Keep going lower.  2) Go higher.   Either way, your client would have done better by not being in the market from the very beginning. 
 
Gregoron, your client bought XYZ at $10,000.  This price was based upon all available information.  You thought that it was a good buy.  XYZ is now at $8500.  The price is still based upon all available information.   Somehow, it is now a bad buy.  I imagine that if it when up to $11,500 instead of down, it would have remained a good buy. 
 
If I buy tuna fish at a $1 a can and the price of tuna goes down to .85 a can, I'm not returning my tuna to get .85 cents back.  If I like the tuna at $1, I'll like it more at .85.  If tuna goes up to $1.15 a can, I'm not rushing out to buy more. 
 
Am I the only one here who is smart enough to realize that we are all clueless to what tomorrow will bring?  And this has always been and will always be the case.
 
Nothing is wrong with not being in the market.  Nothing is wrong with being in the market.  
Oct 9, 2008 1:54 pm

Anon, I like the can of tuna example.  Hypothetically, tuna is .70 a can now YTD.  I guess I'd buy more cause I like tuna. Still waiting for that buy one get one offer.  Thanks for putting it that way.

PS.  I admit that I'm nearly as smart as you are to being clueless about the market

Oct 9, 2008 2:09 pm

That theory makes sense.  Unfortunately, for too many people, they need to start eating their tuna NOW, and can't afford to buy the tuna today, even if it's on sale.  So they are eating the high-priced tuna, while they see all this stuff on sale.


It is my experience that not many people are smart enough or savvy enough to leave cash on the table during good times, in order to buy sale items when times are bad.  Everyone seems to have an all-or-none approach to having their money in the market.
Oct 9, 2008 2:26 pm

Or you could " Average Price " the Tuna. One can bought at 1.15 , one at .80 and the other at .60 , now you have three cans of Tuna for an Average Price of .85

Oct 9, 2008 2:29 pm
B24:

That theory makes sense.  Unfortunately, for too many people, they need to start eating their tuna NOW, and can't afford to buy the tuna today, even if it's on sale.  So they are eating the high-priced tuna, while they see all this stuff on sale.


It is my experience that not many people are smart enough or savvy enough to leave cash on the table during good times, in order to buy sale items when times are bad.  Everyone seems to have an all-or-none approach to having their money in the market.
 
This is a consequence of using a 100% commission-based advisor who starts over at zero ever month and has a dot to keep above a red line to keep their job.
 
Oct 9, 2008 4:07 pm

Let's clean perception about us up. Most of us could afford to be fee-based, even at a broker-dealer.

Oct 10, 2008 4:25 pm
Borker Boy:
B24:

That theory makes sense.  Unfortunately, for too many people, they need to start eating their tuna NOW, and can't afford to buy the tuna today, even if it's on sale.  So they are eating the high-priced tuna, while they see all this stuff on sale.


It is my experience that not many people are smart enough or savvy enough to leave cash on the table during good times, in order to buy sale items when times are bad.  Everyone seems to have an all-or-none approach to having their money in the market.
 
This is a consequence of using a 100% commission-based advisor who starts over at zero ever month and has a dot to keep above a red line to keep their job.
 
 
No it's not.  I look at portfolios built by fee based advisors and see the exact same thing.  It's the way some advisors run their portfolios. 
 
Anway, I'm not so sure B24 meant that people aren't willing to leave say $10,000 of a $200,000 portfolio in cash just in case a good stock takes a tumble and you want to be opportunistic.  I read his comments as people aren't willing to sell BA at a 30 year high of $100 when they think it might go to $110 so they can buy FPL at a 10 year low in the low $30's. 
 
B24, please correct me if I'm wrong.   
Oct 10, 2008 4:39 pm

Cash is king for a lot of reasons. In addition to the obvious ones, leaving it alone (almost making clients beg you to invest it) is almost like sexual foreplay. All right, it just gives peace of mind.