The last five years: Quite a ride, but did you stay in it?

Markets move quickly and can take us on a roller-coaster ride; the key is to keep emotions in check

Mar 25, 2014 @ 12:01 am

By William T. Carroll

stocks, rally, emotions, behavioral finance, bull market, recession, investing
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On March 9, 2009, the Dow Jones Industrial Average closed at 6,547.05, which was, at the time, its lowest close in 12 years. That night, like many nights back in the height of the crisis, people went home wondering: How much lower it could go?

As it turned out, that was the bottom, and if you had bought that day, you probably did very well. Here we are five years later and the Dow is over 16,000, which would have been unthinkable on that March day back in 2009.

That five-year ride has been bumpy both in the U.S. and abroad. Nearly everyone has been touched by the crisis in some way. The unemployment rate in the U.S. reached 10.2% in October 2009 and the yield on the 10-year U.S. Treasury Note reached all-time low close of 1.43% in July 2012. Through unprecedented intervention from the Federal Reserve Bank, things have stabilized and our economy now appears to be firmly on the road to recovery.

So the question now is twofold: Did you buy that day? And did you stay invested?

As the last five years have shown, markets move quickly and can often take us on a roller-coaster ride as we navigate through good news and bad, war and peace, the political machinations in Washington and happenings around the globe. All of this information we are bombarded with can be overwhelming. Many investors learned that lesson the hard way in the recent financial crisis, when fear drove many to liquidate investment positions at the bottom of the market, causing them to miss out on the subsequent rally back.

(Don't miss: Are stocks getting pricey?.)

Most people are very passionate about their money and investments, and rightfully so; after all, they worked very hard to earn it. Even more so, their investments embody their goals and aspirations for their families, as well as a comfortable retirement, and the ability to leave a meaningful legacy. Being mindful of lessons of behavioral finance, it is critical to ensure that emotion is not the driving force in decision making.


The emotional aspects combined with the complexities of the world today underline the need for professional advice. To help take the emotion out of financial decisions, many are now turning toward an advisory or fee-based approach, which places the emphasis on long-term planning. Speaking of "planning," at the foundation of any successful financial outcome is a financial plan. In a financial plan, financial advisers work with their clients to establish goals and develop an appropriate investment framework to pursue those goals. The investment framework that is developed serves as the roadmap for the fee-based advisers to keep clients on track for their goals and help them stay the course during periods of market volatility, thereby avoiding the mistakes many made during the financial crisis. For example, according to Franklin Templeton, from 1991-2011, if you stayed invested in the S&P 500 your average annual total return would be 7.81%. However if you missed the best 10 days in the market over that period, your average annual return drops to 4.14%, miss the best 20 days and it drops to 1.70%.

Combining a financial plan with the support of a global, dedicated research department removes the "emotional aspects" of decision making and significantly increases the probability of success. As markets around the world have become increasingly intertwined, research support becomes more critical to sort through the noise and deliver high-quality, timely advice to clients. This helps financial advisers make the tactical shifts that are right for the long-term, not just in the moment. Following a fee-based approach using the global research backing and their own expertise empowers financial advisers to stick with the financial plans established for their clients and take the emotion out of investment decisions.

But don't just take my word for it; momentum for this kind of approach is building throughout the industry. In fact, recent data from Cerulli Associates suggests that across the industry, the market share for fee-based or advisory accounts increased to 25% in 2013, up from just 18% in 2010. This trend is expected to continue for the foreseeable future as both advisers and clients see the benefits of this type of relationship.

By following this course, the next time there is significant market turmoil; investors will be able to affirmatively answer the question "Did you stay the course?"

William T. Carroll is head of investment solutions, UBS Financial Services Inc.


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