Date: November 8, 2021

The Headline Jane Believed and How It Affected Her Financial Future

In my experience as a financial advisor for more than 30 years, I’ve learned that many investors, even confident, successful, high net worth investors, learn by example, like we do in the rest of our lives. Unfortunately, many times, this example is a mistake they make themselves. With this in mind, I’d like to tell you about “Jane,” a well-educated woman I met before the pandemic who agreed to let me share her story. Some mistakes can be quite costly, as Jane came to realize. My hope is that her case might be instructive in helping guide the way you approach investing.


What Occurred

Jane, a 38-year-old MD in New Haven, CT, had a sizable portfolio that she managed with the help of a financial advisor she grew up with. Her troubles began when she heard a random report predicting that the then-current stock market dip would escalate into a full-blown bear market. Fearing a significant loss, Jane listened to her advisor and sold off her portfolio, locking in truncated gains mixed with some losses.

The market, in fact, went on to recover its losses within two months, during which time Jane remained 100 percent in cash. She had missed the market’s rebound, still fearing an imminent market collapse that never came.

Eventually, Jane realized how much of her investment power had dissipated and decided to make a change. Although it was painful personally, Jane and her financial advisor went their separate ways. At that point, I was happy to take Jane on as a new client.


Why It Happened

As Jane and I discussed her situation, it became clear that she regretted her knee-jerk reaction to scary stock market predictions. It seems that her previous advisor had convinced Jane to load her portfolio with highly volatile small-cap stocks, to the exclusion of other asset types. Jane had misgivings but agreed to this allocation of her assets.

Only after some reflection did Jane come to realize the amount of anxiety her investments were causing her. Fundamentally, the risk profile of her portfolio was a poor match for her risk tolerance. Her aversion to risk not only triggered her panic when the market became volatile, but it also kept her from re-entering the market as it recovered, hoping instead to “catch it on the next dip.”

Jane also realized that her previous advisor was feeding her bad advice. The advisor never explored Jane’s attitude toward risk and the realities of stock market volatility. Jane was a very accomplished pediatrician but knew little about diversification and asset allocation.


What Jane Should Have Done Instead

Jane was hardly alone when she dumped her stocks during a bout of panic selling. Nor was it unusual for her to remain on the sidelines as the market recovered. A 2015 study found that more than 30 percent of investors who freaked out during a sharp market downturn failed to re-enter the market.

My experience as a financial advisor has reinforced my belief about the proper ways to invest – using your intelligence to overcome your emotional reactions to short-term market events.


Ready for a second opinion? Contact the team at Heritage Capital to see how we can help.


What Jane Should Have Considered

No one even raises an eyebrow when you seek out a second opinion on your health and well-being. In fact, it is expected and considered a smart move. Diagnoses can be wrong, and getting a second opinion from another doctor can be a game changer.

Why should this be any different when it comes to your financial well-being?

Jane felt uneasy about her advisor’s recommendations, and for that reason alone, she should have sought a second opinion from another fiduciary financial advisor. In my opinion, here are some other steps she should have also considered:

  1. Don’t sell into a collapsing or perceived bear market: The stock market is fundamentally volatile, and reacting to each emotional zig and zag is likely to end in losses. The reason: Investors have been proven to buy and sell at precisely the wrong times. Listening to the noise and allowing her fear to lead her decision-making reinforced Jane’s existing prejudices, leading to her emotional reactions that were not based on the data at hand. The issue then became how to recover from financial loss. Investors initially say that they will wait until the market pauses to buy back, which it typically does not do after a major bottom has been made. They usually compound their error by waiting until the stock recoups all of its loss and then some. That is the tail wagging the dog.
  1. Align your risk profile with your investment strategy: Jane’s portfolio was not diversified, and she had little understanding of the relationship between diversification and risk. Investing strategies for the high net worth investor include owning many types of assets with different risk characteristics. Strategy diversification helps smooth out volatility as various assets react differently to economic conditions.
  1. Ask for a second opinion: Jane’s original financial advisor did not serve her well, recommending Jane dump her stocks as the market fell. At this point, Jane should have sought out a second opinion from another financial advisor; not a neighbor or a coworker. Selling off all your stocks is a huge decision that can cause more harm than good, as we witnessed in March 2020 with the COVID Crash. A fiduciary financial advisor who has a legal obligation to put clients’ best interests first, could have explained the nature of stock market volatility and the ways to reduce unwanted portfolio risk without hamstringing long-term returns. At Heritage Capital, we advise clients based on current data and historical precedent. Changing investment advisors can be uncomfortable, but that shouldn’t be the reason to stay in a bad relationship.

Had I been advising Jane, I would have dissuaded her from dumping her stocks all at once. If she had already done so, I would have helped her get back into the market quickly and strategically, deploying her cash in several pieces across multiple asset classes so that her overall portfolio risk better aligned with her own risk tolerance.

In terms of timing, I would have discussed employing a mix of immediate purchases, opportunistic entries and good, old-fashioned dollar cost averaging. The latter is a technique in which you invest a fixed sum each time period, allowing you to buy fewer shares when prices are high and more shares when prices are low, keeping the average costs below the average prices of your holdings.


The Outcome

Jane slowly re-entered the market with our help and is now much calmer about stock market volatility. She’s much more attuned to the long-term implications of her investment decisions. Jane now understands the toll that emotional investing can take on wealth formation and growth. Her portfolio is widely diversified, and she balances her investments slowly as her circumstances evolve. We communicate regularly with Jane to discuss performance and strategy. Her retirement plan has been strengthened and her investments now benefit from tax planning. We also guided her on existing insurance products that she bought and how best to incorporate them into her asset mix.

If you would like a second opinion regarding your investment strategy, I would be happy to meet with you to discuss. Everyone deserves the benefit of solid professional advice that doesn’t leave them selling in a panic or missing out on market recoveries. By understanding the fundamentals of long-term investing, you pave the way toward sustainable wealth that can fund your life events and provide for a comfortable retirement.

Schedule a no-obligation conversation with me directly. Best case scenario, we verify that the strategies you are taking make sense. If they’re not, this simple conversation can be a game-changer!

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Paul Schatz, President, Heritage Capital