Nashville – More than 3,000 financial advisers headed here last weekend trying to learn something at the Financial Planning Association’s annual convention.
For most in attendance, the idea was to uncover ideas that make them better practitioners, helping them to improve the services and returns they produce for clients.
They saw seminars on a wide range of investment and money-management strategies, mingled with more than 200 exhibitors hawking everything from exchange-traded funds, to mutual funds following hedge fund strategies, to plain-vanilla funds selling a good long-term track record.
An ordinary consumer set loose in the place would logically jump to the conclusion that investing is complex, especially if you want to do it right.
But the right message to take away is much different.
It’s that there is no one right way to invest in funds.
Fund investors can gravitate towards exchange-traded funds, but it’s not like they’ll miss their goals if they stay put. They can diversify with a fund that acts like a hedge fund, or which invests in one asset or in managed futures, but there’s no imperative to move money that way.
In fact, many advisers in the rooms made compelling cases for keeping things simple and straightforward, even while acknowledging that some clients feel they’re not getting their money’s worth if there is nothing complex in the mix.
The key for consumers is to understand that reaching financial goals is more about finding a strategy that you can live with than it is finding the best available fund.
There are suggestions and guidelines, but few absolutes. An investor’s strategy should reflect their personal preferences, risk tolerances, desire for simplicity or complexity and more.
For example, many advisers suggest rebalancing a portfolio every quarter or year. Rebalancing involves culling your winners and pouring money into laggards so your portfolio allocations stay true to your plan.
But William Bengen, author of “Conserving Client Portfolios During Retirement,” noted that frequency of rebalancing has a lot of effect on returns. Letting your winners run and rebalancing less frequently has, historically, goosed returns by a few percentage points over time, Bengen said; while that seems to encourage less frequent portfolio tweaks, he acknowledged that it can increase a portfolio’s volatility, which some investors will find scary.
The idea, says Bengen, is not to look at which rebalancing plan is right, but to focus on what is right for you. That applies to most investment ideas.
Diversification, for example, is an absolute necessity, but advisers disagree on just what makes a “diversified portfolio.” More than two dozen planners said they thought the typical investor “needed” between six and 15 funds.
At the same time, many said their average client owns many more funds, sometimes owing to participation in various retirement savings plans, investment in sectors or niche markets to spice things up, and so on.
Problem portfolios, most felt, are the ones with too few issues to truly be diversified or too many funds to manage with ease. Anything in the middle, however, seems to be acceptable, provided that it meets the investor’s expectations.
Similarly, asset allocation often sounds like advanced science, but advisers at the conference said placing money into certain asset classes is more a matter of taste than necessity.
None of this serves to make the so-called “investment rules” invalid. Instead, it forces the individual – and their adviser if they have one – to create a personal roadmap, to say “Here’s where I am today, there’s where I want to get in the future; what’s the best route from here to there?”
The answer will combine all of the relevant factors, from how much someone saves to how much risk they can stomach, to when they want to retire and how much they’ll need to make that happen on time.
The “right” answer is the one that allows the individual to complete the course, even if it is not “best” when viewed by an outsider looking for “optimal portfolio construction,” or by someone who might greedily have taken more risk to get greater rewards.
Chuck Jaffe is senior columnist for MarketWatch. He can be reached at jaffe@marketwatch.com or at Box 70, Cohasset, MA 02025-0070.
