GameStop dominated the news for a few weeks. Your investing client is disillusioned. They feel the fundamentals of investing don’t matter when a group of people run a stock from about $20 to over $ 400 in a few days.
Why bother? What do you tell them?
- We’ve been here before. Many investors worked together to run up the price of GameStop and other stocks. It’s only the latest in a long list of surprises. Looking back to the Crash of 1987, high frequency trading was blamed. In the 1990’s money managers “once available only to the very wealthy” were offered as separately managed accounts. In the 2000’s hedge funds were the new kid on the block. Were these long term game changers, distorting the market forever? In many cases they became repackaged as investment vehicles for the public.
- Fundamentals still matter. Remember the Dot Com Bubble? At the time people said the rules had changed. Earnings didn’t matter anymore. All you needed was a good idea. People talked about vaporware, technology that was touted, but had a significant drawback. It hadn’t been developed yet. Eventually investors remembered earnings are what matter. Stocked went back to trading on a multiple of future earnings.
- Investors can now trade stocks for free. True, there are lots of ads for commission free trading. Common sense indicates those firms are still making money on those transactions. Think back to the days of No Load mutual funds. What “no load” really meant was: One less person was getting paid. The advisor. Everyone else was still getting paid by the investor.
- You can’t beat the indexes. Everyone will only own indexes. They are right on the first part. If you bought and sold the underlying stocks, commissions would cut into the return. Indexes are great when the market is rising. If the market declined 10% would everyone be content and say “I’m happy with the index’s return?” No. They would want a human involved who understood asset allocation.
- You can’t beat the market. There’s no need for active management. Here’s a better argument. The return you need to achieve is the one getting you to your target goal. I’ve heard an advisor call it “the family index.” If you have a long time horizon, the number is often modest. Best of all, if you have a few very good back to back years, you can dial back the risk level as you get closer to retirement. The drawback is your return always needs to be positive, otherwise you lose ground. Live advisors who understand you and your needs help make this possible.
- With Robo advisors, you don’t need human advisors anymore. This does appear to eliminate the middleman. A product that automatically rebalances between stocks and bonds (cash too) sounds remarkably like a balanced mutual fund. They’ve been around almost 100 years. Advisors are no longer just stockbrokers. Clients needs involve more than stocks, bonds and cash.
- The market is being driven by a handful of stocks. It’s easy to make this case. It’s happened before. Experienced advisors can tell you during the 1960’s and ‘70’s people talked about the Nifty Fifty. Similar situation. Two factors make a difference: If company earnings keep growing as expected, stocks tend to rise. Second, sector rotation is a factor. When some stocks slow or stop growing, others usually take their place.
No once can accurately predict the future? Markets are cyclical. It might be a good idea to revisit the Ibbotson “Mountain Chart.” Some variations show major economic and world events and how the market reacted during and after those periods. It might appear “Investing will never be the same". Helping to navigate these waters is another way advisors add value.