Re-Igniting Your Passion for the Business

Wednesday, April 4th, 2012

“By mak­ing one small change to my weekly rou­tine, I’ve been able to recap­ture some of my excite­ment for the busi­ness.” – Vet­eran Chairman’s Club advisor

Suc­cess­ful advi­sors con­sis­tently tell me they’ve lost enthu­si­asm and pas­sion for their work com­pared to 10 or 15 years ago. Advi­sors have two choices when this hap­pens; either accept it as a sad real­ity or, put in place strate­gies to rekin­dle the fire that burned ear­lier in their career.

In many regards, loss of enthu­si­asm is understandable:

· If you’ve been at this for a while, you often don’t have the same sense of excite­ment about win­ning new clients that you did in your early years the industry

· Clients are much more demand­ing and the media dra­mat­i­cally more critical

· Your focus has shifted from build­ing a busi­ness to man­ag­ing it; often with added com­plex­ity and the has­sles of man­ag­ing peo­ple along the way

· The global finan­cial cri­sis has added huge stress and put pres­sure on revenues

· Age is a fac­tor: few of us have the same energy at 60 that we did at 45, or at 45 that we did at 30

And then of course there’s mar­ket per­for­mance over the past ten plus years. One vet­eran advi­sor described it this way:

“I’ve been in this busi­ness for over 30 years. For most of the first 20 years I looked for­ward to meet­ings with clients; they were mak­ing money and I felt I was adding value. By con­trast, most of the past ten years have been bru­tal; in meet­ing after meet­ing I’ve found myself apol­o­giz­ing for performance.”

In the cir­cum­stances it’s absolutely under­stand­able that our excite­ment is down com­pared to the past. That said energy and pas­sion is essen­tial to imple­ment new ini­tia­tives and inspire con­fi­dence with exist­ing and prospec­tive clients.

Here are three dif­fer­ent approaches that can help you restore your energy and excite­ment level, includ­ing one that helped a vet­eran advi­sor sig­nif­i­cantly increase his enthusiasm.

Strat­egy One: Boost your energy level

While energy alone won’t rekin­dle your pas­sion, feel­ing alert and ener­gized is a nec­es­sary ingre­di­ent to bring excite­ment to your work.

Some advi­sors tell me they feel exhausted at the end of the day. I’ve writ­ten in the past about four proven strate­gies to boost your energy level:

· Reg­u­lar exer­cise to start your day:

Even a brisk 30 minute walk makes a difference.

· Fresh air and sunshine:

Espe­cially as the weather is get­ting bet­ter, build in 5 minute fresh air breaks in the morn­ing and after­noon and before key meet­ings (and much bet­ter at boost­ing energy than a trip to Starbucks)

· Diet:

Aston­ish­ing as it may appear a recent New York Times arti­cle reported that parole board ver­dicts grew dra­mat­i­cally more severe as the day pro­gressed and fatigue set in, but were more lenient after board mem­bers restored energy with some fruit.

If your energy level dips later in the day, con­sider light­en­ing up on lunch and adding serv­ings of fruit to your daily routine.

· Fre­quent vacations:

Most of us need annual breaks of two weeks or longer to recharge. Beyond this, fre­quent short breaks can help main­tain moti­va­tion; even a three or four day long week­end can have a pos­i­tive impact.

That’s because research shows that the biggest boost on moti­va­tion from vaca­tions isn’t actu­ally the vaca­tions them­selves, but rather the antic­i­pa­tion before­hand. Sched­ul­ing quar­terly or bi-monthly short breaks means we always have a mini-vacation to look for­ward to.

Strat­egy Two: Get energy out­side your business

Many advi­sors get rein­vig­o­rated through activ­i­ties that have lit­tle to do with our busi­ness. That energy will have a pos­i­tive impact when it comes to the excite­ment you bring to bear on client interactions.

Some exam­ples of doing things out­side the norm:

· Phys­i­cal chal­lenges: Train­ing for marathons or for hikes up Machu Pic­chu or Mount Kilimanjaro

· Dream vaca­tions: Going on two to four week trips to des­ti­na­tions that you’ve always dreamed of; whether it be Hawaii, Aus­tralia or an African safari

· Intel­lec­tual chal­lenges: I talked to one advi­sor who began attend­ing the lead­ing edge TED con­fer­ence (TED stands for Tech­nol­ogy, Enter­tain­ment and Design) in Cal­i­for­nia; another advi­sor attends sum­mer courses at Oxford. In both cases they return excited and inspired.

· Expand­ing your think­ing: You don’t have to travel long dis­tances to get fresh ideas. The Rot­man MBA pro­gram at the Uni­ver­sity of Toronto, where I teach, offers 5pm speak­ers series with some of today’s top busi­ness thinkers. Last fall, I spoke to an indus­try par­tic­i­pant who began attend­ing these ses­sions to get fresh ideas and con­sis­tently walked away ener­gized as a result

· Giv­ing of our­selves: I’ve recently talked to four dif­fer­ent advi­sors who orga­nize ambi­tious fundrais­ing events in their com­mu­nity. In every instance they say the sense of accom­plish­ment from the suc­cess of these events has made this among the most reward­ing things in their lives

In the per­fect world, we’d get all the sat­is­fac­tion and ful­fill­ment we need from within our busi­ness. In the real world, we some­times have to look beyond our busi­ness for the moti­va­tion to oper­ate at a peak level.

Strat­egy Three: Get energy inside your business

Rec­og­niz­ing that many advi­sors have to look exter­nally to cre­ate moti­va­tion, the most sus­tain­able way to rebuild pas­sion is by doing so from within your business.

In late Feb­ru­ary, I wrote an arti­cle about three ways advi­sors can moti­vate their team. One of those was to help the peo­ple you work with feel they’re mak­ing a real dif­fer­ence and get a sense of mis­sion from their work. To help instill that feel­ing of pur­pose, I sug­gested that advi­sors set aside five min­utes in their weekly staff meet­ing to focus to talk about one client they met with in the past week who they had really helped.

I got a call from a suc­cess­ful vet­eran advi­sor who had fol­lowed this advice and was aston­ished by the result:

“This was on the agenda for five min­utes but we ended up going well past that. It was the most engaged I can recall see­ing the mem­bers of my team. But the biggest sur­prise was how I felt after­wards. By mak­ing one small change to my weekly meet­ing to focus on a client where we’d made a real dif­fer­ence in their lives, my enthu­si­asm increased. As a result, I’ve been able to recap­ture some of my excite­ment for the busi­ness; and we’re mak­ing this a per­ma­nent addi­tion to our weekly plan­ning meetings.”

I heard from another advi­sor who had been using a vari­a­tion of this idea. When­ever clients express appre­ci­a­tion for the good work that she’s done, she thanks them and then goes on to say:

“I’m delighted you’re pleased; that’s ulti­mately the biggest reward I get from the work I do. If pos­si­ble, I’d like a favour: I want to share your com­ments with the mem­bers of my team. I won­der if I could ask you to send me a short email, sum­ma­riz­ing what you’ve just told me. A few lines are all I’m look­ing for. I could tell them about this of course, but it would have much more impact com­ing from you directly.”

Clients almost always agree. The advi­sor sends an email thank­ing them in advance for tak­ing the time to do this, and tells them it would be greatly appre­ci­ated if they would reply with a few lines. There have been three ben­e­fits to this: The advi­sor feels more pos­i­tive; her team is more ener­gized and finally, they got per­mis­sion from some clients to put their com­ments on the advisor’s website.

Every advi­sor has to find their own approach to main­tain­ing moti­va­tion. What­ever strat­egy works for you, if you have ambi­tious goals to move your busi­ness for­ward, bring­ing gen­uine pas­sion and enthu­si­asm to your busi­ness is Job One. After all, if you’re not excited about the work you do, you can’t expect your team and your clients to be.

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Tags: Business Veteran, Circumstances, Complexity, Confidence, Energy Level, Excitement Level, Global Financial Crisis, Hassles, Industry Clients, Initiatives, Managing People, Market Performance, Passion, Place Strategies, Prospective Clients, S Market, Sad Reality, Stress, Three Different Approaches, Two Choices
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A Q1 letter to clients: Bernanke, Buffett and Siegel on the Prospects Ahead

Wednesday, April 4th, 2012

Each quar­ter since 2008, I have posted a tem­plate for a let­ter to serve as a start­ing point for advi­sors look­ing to send clients a sum­mary of what’s hap­pened in the past 90 days; and the out­look for the period ahead.

Advi­sors have told me that they’ve got a great response to these quar­terly let­ters and the tem­plates rank among my most pop­u­lar arti­cles. This let­ter goes into more depth on global growth fore­casts than past tem­plates. If this is more detail than you think your clients will be inter­ested in you can eas­ily delete this section.

Just a reminder that if you’re going to use this let­ter, take the time to cus­tomize it and put it into your own words, so that it truly does rep­re­sent your point of view.

An overview of Q1 2012 mar­kets: Bernanke, Buf­fett and Siegel on the prospects ahead:

The first quar­ter of 2012 rep­re­sented the strongest start for the U.S. stock mar­ket since 1998; with Japan turn­ing in its best first quar­ter gains in 24 years. This was largely dri­ven by a reduc­tion of fears about an extremely neg­a­tive out­come in Europe, as well as stronger eco­nomic data in the U.S.

Of course, there are some for­mi­da­ble issues still to be addressed. This let­ter pro­vides per­spec­tive on some of these issues, and out­lines some thoughts on what we can expect for the bal­ance of 2012 and beyond. As part of that, I have tapped into recent com­ments from Ben Bernanke and War­ren Buf­fett, as well as Chris­tine Lagarde; man­ag­ing direc­tor of the Inter­na­tional Mon­e­tary Fund and the Whar­ton School’s Jeremy Siegel, today’s lead­ing mar­ket historian.

Before get­ting into their views, here’s a sum­mary of mar­ket per­for­mance in the first quar­ter, all in local cur­rency so as to exclude cur­rency fluc­tu­a­tions. Even with strong first quar­ter returns, most mar­kets with the excep­tion of the United States are under­wa­ter over the past 12 months. Its resource expo­sure has meant that Canada has been a par­tic­u­lar lag­gard over the past year.

The IMF’s view: A reduced fore­cast for global growth:

The sin­gle fac­tor that more than any other will drive stock mar­kets over the mid-term is the path of global eco­nomic growth; Europe in par­tic­u­lar remains a ques­tion mark. In early Jan­u­ary, the Inter­na­tional Mon­e­tary Fund reduced its fore­cast for global growth, and pre­dicted that con­ti­nen­tal Europe would see a mild reces­sion in 2012. Here are excerpts from the IMF’s Jan­u­ary fore­cast for eco­nomic growth:

Eco­nomic Growth:

Bernanke & Lagarde: Sign of improve­ment … but efforts must continue:

Since this fore­cast was released in Jan­u­ary, actions by global gov­ern­ments have changed the Euro­pean out­look for the bet­ter. Indeed, it was greater opti­mism about a res­o­lu­tion to Europe’s issues that fueled the first quarter’s strong mar­ket performance.

There is still much work to do, how­ever. March 20^th fea­tured a press con­fer­ence by Chris­tine Lagarde, Man­ag­ing Direc­tor of the Inter­na­tional Mon­e­tary Fund and, for­merly Finance Min­is­ter in France. She painted a more pos­i­tive but still cau­tious pic­ture. Here’s how her remarks began:

“In terms of global eco­nomic out­look, we are cer­tainly not, and I do say not in as bad a sit­u­a­tion as we were only three months ago; and there have clearly been some sig­nif­i­cant improvements.”

“Cou­pled with an uptick com­ing out of the United States of Amer­ica, it gives an over­all pic­ture (for Europe) that is slightly more pos­i­tive than it was three months ago; not to say that all the dif­fi­cul­ties have been cleared. If I have one mes­sage, it’s that the reforms and the efforts under­way in advanced economies have to con­tinue and that the same vig­or­ous rigor has to be applied by Gov­ern­ments in the pro­grams and the efforts that they have undertaken.”

The very next day, Ben Bernanke spoke to the House Com­mit­tee on Over­sight and Gov­ern­ment Reform about the Fed­eral Reserve Board’s views on Europe. He pointed to improve­ment in Europe and focused on three pos­i­tive steps on the con­ti­nent to increase sta­bil­ity. He also dis­cussed favourable results of stress tests of banks in the event of a severe pull­back in the U.S. economy.

But his clos­ing com­ments echoed Chris­tine Lagarde’s note of cau­tion about the need for fur­ther action to address Europe’s struc­tural issues:

“The recent reduc­tion in finan­cial stress in Europe is wel­come given our impor­tant trade link­ages. The sit­u­a­tion how­ever remains dif­fi­cult and it’s crit­i­cal that Euro­pean pol­icy lead­ers fol­low through on their com­mit­ment to achieve a last­ing sta­bi­liza­tion. I believe our Euro­pean coun­ter­parts under­stand the chal­lenges they face and they’re com­mit­ted to take the nec­es­sary steps to address those issues.”

Should you be inter­ested in watch­ing them, here are links to the com­ments from Ben Bernanke (CLICK HERE) and Chris­tine Lagarde (CLICK HERE).

Also, you can CLICK HERE to go to the IMF’s most recent global growth forecast.

From my own point of view, it’s worth not­ing that given Euro­pean issues and a slow­down in China, there is broad con­sen­sus that the next five years will see “2, 6 and 4” growth; an aver­age of 2% in devel­oped coun­tries, and 6% in emerg­ing economies, lead­ing to 4% global growth over­all. It’s this diver­gence in growth between devel­oped and emerg­ing coun­tries that is dri­ving increased focus by multi nation­als on faster grow­ing emerg­ing economies.

War­ren Buf­fett: “America’s best days lie ahead:”

In the face of chal­lenges for devel­oped economies, there is a per­sis­tent view of Amer­ica as an “empire in decline.” This was rein­forced by last year’s down­grade of US debt and by the stale­mate in Con­gress over deal­ing with America’s deficit and debt challenges.

As I look at for­mu­lat­ing rec­om­men­da­tions for my clients, I don’t sub­scribe to the view of a declin­ing Amer­ica. With­out dis­miss­ing its issues, the biggest com­pet­i­tive advan­tage for United States is its vital­ity and capac­ity for change and inno­va­tion. It con­tin­ues to dom­i­nate in high tech, and remains a mag­net for the best and bright­est tal­ent from around the world.

I’m not alone in this view. Here’s an excerpt from War­ren Buffett’s annual let­ter to investors released in Feb­ru­ary:

“In 2011, we will set a new record for cap­i­tal spend­ing, $8 bil­lion and spend all of the $2 bil­lion increase in the United States. Money will always flow toward oppor­tu­nity, and there is an abun­dance of that in Amer­ica. Com­men­ta­tors today often talk of “great uncer­tainty.” But think back, for exam­ple, to Decem­ber 6, 1941, Octo­ber 18, 1987 and Sep­tem­ber 10, 2001. No mat­ter how serene today may be, tomor­row is always uncertain.”

“The prophets of doom have over­looked the all-important fac­tor that is cer­tain: Human poten­tial is far from exhausted, and the Amer­i­can sys­tem for unleash­ing that poten­tial, a sys­tem that has worked won­ders for over two cen­turies; despite fre­quent inter­rup­tions for reces­sions and even Civil War remains alive and effec­tive. We are not natively smarter than we were when our coun­try was founded, nor do we work harder. But look around you and see a world beyond the dreams of any colo­nial cit­i­zen. Now, as in 1776, 1861, 1932 and 1941, America’s best days lie ahead.”

You can read War­ren Buffett’s full let­ter to investors HERE.

A long term per­spec­tive on valuations:

While eco­nomic growth enables long term increases in cor­po­rate prof­its as a whole, in the short and mid-term we have to pay a fair value for the com­pa­nies we buy. Any­one who invested at the peak of the U.S. mar­ket val­u­a­tions in 2000 learned a hard les­son about the per­ils of los­ing focus on what we pay for a dol­lar of earnings.

There are few more hotly debated issues on Wall Street than whether today’s mar­ket is over­val­ued, under­val­ued or priced just right. In look­ing at all the avail­able data, my own con­clu­sion is that the mar­ket is roughly fairly valued.

That’s not to say it doesn’t face some speed bumps in the period ahead. But I was inter­ested to see a March 29 inter­view with Jeremy Siegel of the Whar­ton School. Author of Stocks for the Long Run, which exam­ined almost 200 years of mar­ket data, in this inter­view Siegel looks at his­tor­i­cal prece­dent; and sees sig­nif­i­cant upside poten­tial at today’s stock val­u­a­tions. To see his inter­view, CLICK HERE.

What this means for your portfolio:

While all port­fo­lios are cus­tomized to clients’ spe­cific needs, there are three guid­ing prin­ci­ples to the advice that I offer.

1. The first relates to the allo­ca­tion between stocks and bonds, and comes from Ben­jamin Gra­ham; the Colum­bia pro­fes­sor who was War­ren Buffett’s teacher, and who is con­sid­ered the father of value invest­ing. In a recently dis­cov­ered 1963 talk, Gra­ham had this to say on asset allocation:

“In my nearly fifty years of expe­ri­ence on Wall Street, I’ve found that I know less and less about what the stock mar­ket is going to do but I know more and more about what investors ought to do. My sug­ges­tion is that the min­i­mum amount (of the investor’s) port­fo­lio held in com­mon stocks should be 25% and the max­i­mum should be 75%. Con­se­quently the max­i­mum amount held in bonds would be 75% and the min­i­mum 25%; any vari­a­tions should be clearly based on value considerations.”

2. The sec­ond prin­ci­ple relates to, bar­ring a sig­nif­i­cant change in cir­cum­stances, stick­ing within the invest­ment frame­work that we’re decided upon.

Some of you may recall my advice in early 2009, as we faced what appeared to be an end of the world sce­nario and some stocks hit lows they hadn’t seen in 20 years. At that time, I urged clients to main­tain a core level of equity expo­sure. Recently, I have had ques­tions from clients about increas­ing equity weight in port­fo­lios, given low inter­est rate and strong stock per­for­mance in the first quarter.

While I am always happy to dis­cuss this on a case by case basis, given the level of uncer­tainty that still exists, I gen­er­ally advise against increas­ing equity allo­ca­tion from the level that we had going into 2012.

3. The final prin­ci­ple relates to the role of cash flow from invest­ments. In an uncer­tain envi­ron­ment for eco­nomic growth and equity returns, we con­tinue to place pri­or­ity on the cash yield from invest­ments. In my view, the returns on some REITs, cor­po­rate bonds and div­i­dend stocks in selec­tive sec­tors con­tinue to make these attrac­tive rel­a­tive to the avail­able alternatives.

Should you have any ques­tions on any­thing I’ve cov­ered in this note or on any other issue, please feel free to con­tact myself or one of the mem­bers of my team directly. And as always, thank you for the oppor­tu­nity to serve as your finan­cial advisor.

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Tags: 24 Years, Ben Bernanke, Christine Lagarde, Currency Fluctuations, Economic Data, First Quarter, Global Growth, Growth Forecasts, Historian, International Monetary Fund, Jeremy Siegel, Leading Market, Managing Director, Market Performance, Negative Outcome, Outlines, Quarterly Letters, U S Stock Market, Warren Buffett, Wharton School
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A Q1 Letter to Clients – Two Critical Lessons from Japan

Wednesday, May 11th, 2011

An end of quar­ter let­ter to clients — Invest­ment advice from Mark Twain

Given recent events in Japan and North Africa, many clients are look­ing to their advi­sors for direc­tion on what they should do.

This tem­plate for an end of quar­ter let­ter is intended to be a start­ing point for your own let­ter to clients. One note of cau­tion — to be effec­tive, it has to reflect your approach, per­son­al­ity and point of view. Be sure to take the time to cus­tomize the let­ter to your own situation.

April 4, 2011

Two crit­i­cal lessons from Japan

“The only cer­tainty is that noth­ing is certain”

Pliny the Elder

First cen­tury Roman author and naval commander

“It ain’t what you don’t know that gets you into trouble.

It’s what you know for sure that just ain’t so.”

Mark Twain, 1835–1910

At the end of each quar­ter, I send clients a let­ter sum­ma­riz­ing events of the past three months … and usu­ally try to find a rel­e­vant quo­ta­tion to estab­lish the tone for my note.

For this quarter’s let­ter, I have selected quotes writ­ten 1900 years apart to high­light two impor­tant lessons  for investors, made trag­i­cally appar­ent from the recent events in Japan. One is the need to con­struct port­fo­lios that expect the unex­pected and antic­i­pate the unan­tic­i­pated.  And the other relates to avoid­ing one of the costli­est traps that ensnares investors.

Before get­ting into detail on those lessons, here’s a quick recap on the first quarter.

Mar­ket per­for­mance in the first quarter

Mar­kets in Jan­u­ary and Feb­ru­ary reflected a con­tin­u­a­tion of last year’s pos­i­tive sen­ti­ment. This was spurred by solid cor­po­rate prof­its and a broad con­sen­sus that while the global econ­omy might not expe­ri­ence a strong recov­ery going for­ward, it would see growth.

March did begin with an ini­tial set­back . The earth­quake and tsunami in Japan on March 11, which took a dread­ful toll in human lives, clearly reduced short-term prospects for the global econ­omy. The tur­moil in North Africa, while pos­i­tive for oil prices, also had a neg­a­tive impact on mar­kets due to con­cerns about the effect on con­sumer demand. By the end of March, how­ever, pos­i­tive eco­nomic growth reports in the US and Europe allowed most mar­kets to recover their ini­tial losses.

As a result, devel­oped mar­kets gen­er­ally saw gains at the end of the first quar­ter that put them on track for solid per­for­mance in 2011. Below are first quar­ter results for key mar­kets — note that these are in local cur­ren­cies, so that the effect of swings in the Cana­dian dol­lar are not reflected here.

% change (all in local currencies)

Learn­ing to live with uncertainty

If they oper­ate effi­ciently, stock and bond mar­kets incor­po­rate all the avail­able infor­ma­tion at a given point in time. That’s why when sov­er­eign debt prob­lems emerged in Greece early last year, other Euro­pean coun­tries seen as hav­ing poten­tial prob­lems along the same lines saw an imme­di­ate spike in the cost of insur­ing their debt. Even though they hadn’t run into prob­lems yet, the mar­ket fac­tored this pos­si­bil­ity in.

Mar­ket ana­lysts spend many thou­sands of hours each year on these kinds of issues — with enough time and research, slow form­ing prob­lems like gov­ern­ment debt prob­lems can be iden­ti­fied before a cri­sis unfolds.

What can’t be antic­i­pated are devel­op­ments that are by their nature unpre­dictable. We’ve had at least four such events in the past year:

• Last April’s vol­canic erup­tion in Ice­land that spewed ash in the air, shut down 100,000 transat­lantic flights and cost the air­line indus­try $2 billion;
• Also last April, the explo­sion of the Deep­wa­ter Hori­zon oil rig in the Gulf of Mexico;
• Com­menc­ing last Decem­ber, street protests result­ing in changes of lead­er­ship in a num­ber of coun­tries in North Africa, lead­ing directly to the cur­rent war in Libya;
• And of course the earth­quake, tsunami and nuclear-reactor crises in Japan.

In light of episodes like these, investors need to take away two key lessons.

Les­son One: Expect the unexpected

The only way to deal with uncer­tainty and man­age the impact of unfore­seen events is to build strict risk con­trols into port­fo­lios, sim­i­lar to those used by the most sophis­ti­cated pen­sion funds.  While the risk of one time inci­dents can’t be elim­i­nated,  through diver­si­fi­ca­tion and risk man­age­ment we can  limit the dam­age when neg­a­tive events occur — whether they be mas­sive frauds such as Enron, sud­den bank­rupt­cies like Lehman Broth­ers,  vol­canic erup­tions, oil rig explo­sions or earthquakes.

I thought it might be use­ful to pro­vide an overview of my approach to risk man­age­ment in port­fo­lio con­struc­tion. There are three steps in this process.

Step one: Iden­tify tar­get mix

First, we iden­tify the tar­get mix of stocks, bonds and cash that, based on his­tor­i­cal prece­dent and cur­rent val­u­a­tion lev­els, will over time have a high like­li­hood of pro­vid­ing the returns you need to achieve your long term goals with a level of volatil­ity you can live with along the way.

Step two: Diversify

Next we and the money man­agers we work with care­fully diver­sify your port­fo­lio, by plac­ing lim­its on the expo­sure to any one com­pany, indus­try sec­tor or region. For indi­vid­ual hold­ings, it’s typ­i­cally an absolute per­cent­age of your port­fo­lio — so for exam­ple no one stock should make up more than 5% of your equity hold­ings  and no one bond should  rep­re­sent more than 3% of your fixed income exposure.

As well, no mat­ter how opti­mistic we are about an indus­try sec­tor or region, its weight should never be more than 50% above its under­ly­ing impor­tance in the mar­ket as a whole.

Step three: Stay balanced

In the final step, at least once a year we con­duct an in depth analy­sis of each port­fo­lio. Over time, asset classes, indus­try sec­tors and indi­vid­ual stocks that do well will increase their pres­ence in your port­fo­lio and bump up against the risk con­trol limits.

At that point, your port­fo­lios need to be rebal­anced back to the tar­get asset allo­ca­tion and some of the posi­tions that have out­per­formed might be trimmed  to stay within risk con­trol lim­its. Some investors find this very dif­fi­cult — after all you’re sell­ing exactly those invest­ments that have done the best.

But it’s the only way to stay truly diver­si­fied and con­trol the risk that accom­pa­nies over­ex­po­sure to any one stock, indus­try sec­tor or geo­graphic region.  And it’s also the only way to get some pro­tec­tion from things that sim­ply can’t be anticipated.

Les­son Two: Avoid overconfidence

Aside from the time entailed, there is one big neg­a­tive to the risk con­trolled approach to port­fo­lio con­struc­tion — in the short and mid-term, there will always be some­one who’s made a big bet that’s paid off and who is doing bet­ter than you as a result.  Because it elim­i­nates big bets, a risk con­trolled approach to invest­ing will sel­dom give you brag­ging rights on the golf course.

Investors who take the big bet approach typ­i­cally have a high degree of con­fi­dence in their invest­ments; after all, if you’re absolutely cer­tain about a com­pany or indus­try, why bother to diver­sify?  On the other hand, research  by the Uni­ver­sity of Chicago’s Richard Thaler has demon­strated that over­con­fi­dence is among the most costly traits an investor can have.

Think no fur­ther than the Cana­di­ans who stuffed their port­fo­lios with Nor­tel dur­ing the tech boom. At its peak, Nor­tel rep­re­sented 35% of our mar­ket  — and 50% plus of many port­fo­lios. While not nearly as  extreme, a case can be made that as a result of their strong per­for­mance over the past ten years, today many investors have too much of their sav­ings in Canada’s banks, gold, oil and min­ing stocks and Cana­dian stocks as a whole. In fact, many global ana­lysts today iden­tify Canada as one of the most expen­sive stock mar­kets among all the devel­oped countries.

The quote from Mark Twain at the start of this let­ter says it all — what gets us in trou­ble aren’t the things we’ve iden­ti­fied as ques­tion marks and causes for con­cern. Rather, port­fo­lios crater because of the things that we’re absolutely pos­i­tive about — right until unan­tic­i­pated occur­rences catch us by surprise.

We’ve always had unex­pected events and always will — and despite these economies have grown, com­pa­nies have pros­pered and stock mar­kets have gen­er­ated pos­i­tive returns.  The key to ben­e­fit­ing from this long term growth has been to diver­sify so that no sin­gle event can cre­ate per­ma­nent dam­age to  port­fo­lios.  When it comes to long term invest­ing, it’s not only that a slow and steady approach wins the race, but more impor­tantly slow and steady sur­vives to cross the fin­ish line.

I believe that we will work through the recent events also — and that investors with a bal­anced approach and a long term view will be well rewarded.  The approach to risk man­age­ment I’ve described may not be fun or sexy in the short term, but all the evi­dence at hand sug­gests that over time it will serve you well, get­ting you to your goals with the least amount of stress and dis­tress along the way.

At our next meet­ing, I’d be happy to dis­cuss the impact of rebal­anc­ing on long term returns. Should you have any ques­tions  in the mean­time on your port­fo­lio, the con­tents of this note or any other issue, please give me a call — I’d be happy to deal with your ques­tions on the phone or at our next meeting.

As always, thank you for the oppor­tu­nity to work together.

Best regards,

Name of advisor

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