I have discussions with advisors all the time about portfolio performance – more specifically about recent portfolio performance. I almost never have conversations (longer than five minutes) with clients about recent portfolio performance. Here’s why:

There are two components to this discussion:

1.       Is recent portfolio performance important for an investor?

The answer is no. Obviously portfolio performance is important over the course of your investing lifetime and it has a significant impact on what planners call your terminal wealth (I don’t like that term either). But all investment strategies go through good and bad periods, and no one has shown an ability to adjust their strategy or move to a new one before a bad period begins or in anticipation of a good period starting. The best managers stick with time tested strategies and periodically suffer through the bad times with their investors.


2.       Why do advisors focus on short term results? 

Most advisors make the fundamental mistake of focusing their clients on investment results because the advisor believes that this is their value-add. They offer up out-performance as their value proposition…a huge mistake. Simply put, the overwhelming majority (my belief is that it’s more than 90%) of advisors that manage client money themselves do not add value above and beyond a simple buy and hold index approach. Advisors that outsource to professional money managers (mutual funds or separately managed accounts) have a much greater chance of showing value through investing but the great majority of these managers also underperform.


So let’s walk through these two points. Various studies show that investors and advisors alike tend to “chase returns” which is an outcome for those who focus on short term results. Its human nature to feel frustrated when you perceive things aren’t going well and that someone somewhere is enjoying great results. So you sell what’s doing poorly and move on to what’s done well lately. You literally sell low and buy high. (However, some people hold on to their losers in the hope that it will turn around but that usually occurs with a specific security or an illiquid investment like real estate. We are talking about an entire investment strategy in this case.)

How do you combat returns-chasing? Your investment strategy should make intuitive economic sense to you. It should appeal to your common sense; you should be able to explain it to someone in a concise manner. If you don’t understand it at a high level, you have no business investing your life savings there. Most investors trust an advisor to do the right thing but you must go beyond this to take some responsibility for your money. And by doing that you must accept that all viable investment strategies have their day in the sun as well as their bad periods. Message: don’t focus too much on short term results.

The best advisors are confident in their value proposition and are able to articulate it succinctly and understandably. They don’t use industry jargon and they aren’t patronizing. They believe nothing is too complex to explain to a client or prospect. The most important aspect of the advisor engagement is outstanding, responsive service. The most important services they offer are sound advice and education about financial matters. If they lead with investments or worse, investment products, run the other way as fast as you can. Good advisors ask a lot of questions before they can even ascertain whether or not they can help you. Now of course performance is an important component of this engagement but it’s not the defining component. It should be discussed and reported no more than quarterly and in many cases only annually. This discussion should last no more than 15 minutes or so – “the portfolio performance for the trailing 12 months has been X and since the inception of our engagement it has been Y. We recommend (no) or (these) changes going forward and here are the reasons why”. More often than not, changes to the portfolio should revolve around financial events in your life and not around what markets are doing lately or politics or world events.

The most relevant discussions revolve around your financial plan. Here are pertinent questions that might affect how your money is invested:

a.       Has your salary or position changed? Your job security?

b.       Is there a reason that your appetite for risk might have changed?

c.        Are you planning any large expenditures that we haven’t discussed?

d.       Do you expect any large inflows such as a bonus, settlements, inheritance?

e.       Are there any potential health issues in the family?

These are important questions that should be asked at least annually and some planning meetings will revolve around just one of these issues in its entirety.

Don’t think that the advisory relationship is all about portfolio performance and don’t focus on short term performance. The decisions you make today on how you deploy your assets have a lasting impact on your lifestyle. The advisor you choose to help you is one of the biggest decisions you will make in your life.