Investment Consult

September 16, 2005

What my clients teach me

I've been a financial planner for more than 25 years, and although car styles and technology have changed, I still preach most of the solid financial principles that were true back then.

Here's what I've learned:

Early in my career, I always advised against investments that seemed to be a real long shot. But lately when I see a client eager to go into a highly speculative venture, I try not to talk him out of it, but instead to at least limit the size of his investment. Nowadays, in general, I think it's okay for someone to keep 10 percent of his money in riskier investments, whether they're stocks of a single foreign country or a risky medical venture started by colleagues.

Speculative investments still require due diligence, however. But at least a client won't be kicking herself (and me) years later saying, "If it weren't for that darn Altfest, I coulda been rich!"

Skepticism based on limited knowledge might be misplaced. One client said he wanted to work with a trader who claimed to have his own strategy that had brought annual returns of 15 percent or more every year for more than 25 years. I told my client that if he couldn't explain to me how this person did it, it would be foolish to trust him based on hearsay.

I investigated and found out that the trader did, in fact, have the years of experience and annual returns that he stated he had. I became so interested in his proprietary trading strategy, I even considered using it for some of my own clients.

My client put a fraction of his portfolio with the trader, and I agreed with his decision. The lesson: If a client comes up with something, I shouldn't dismiss it immediately just because I don't know about it.

Hanging onto a laggard may be emotionally comforting to a client. Even the wisest investor might put money into something that sinks. If you've taken a big hit, and your price is languishing with little chance of revival, I'll advise you to sell.

Some people don't want to give up, though. They cling stubbornly to the investment, hoping for it to rebound. One client, who took a huge hit with a tech stock, would now be better off to sell, especially because any turnaround is unlikely to be as valuable as his tax benefit from the sale. But he refuses.