Most financial advisory businesses grew rapidly during the last decade. This was, however, the greatest bull market in history! For most of the past decade, simple investments in individual stocks, private accounts or even mutual funds have met investor’s expectations. But the 1990’s are over, and with it the realization that it’s not so easy. Financial advisory firms are laying-off thousands and investors are now wondering what to do.

Surveys performed during 1998 and 1999 showed investors expecting annual returns averaging 20% or more. Since the stock market’s return for the 1990s was about twice its average rate of return, any regression to the mean would lead to below average returns for the next 5 to 10 years, most likely in the 5% to 7% range. Since most investors have suffered significant losses over the past two years, they are now forced to rethink their approach to investing. Without much real analysis, many investors have already begun to reshape their portfolios by pulling money out of stocks and moving it into bonds and real estate. However, this is the exact same type of mistake that got them into technology in 1999, bonds in 1994, and real estate in 1989. It’s just not that easy!

In order to look credible after having done so poorly for their clients over the past two years, many financial advisors are finally suggesting that their clients move substantial portions of their portfolios into bonds. The advice appears reasonable because bonds have done well lately and are more conservative than stocks. However, the easy money in bonds has already been made and yields are at historic lows. So, let’s step back for a moment and see how much money you can make on bonds over the next 10 years. Currently a 10-year U.S. Treasury Bond will pay you about 5.2%. Now for the part that will trip-up most investors – interest rates will likely rise over the next few years from these low levels. If interest rates rise just 2%, up to only 7.2% over the next few years, today’s 10-year bonds will drop 12% in value. If you hold the bond until maturity, you will get your 5.2%, but if you need or want to sell it anytime in between, you are more likely to lose money as interest rates are more likely to rise over the next few years.

As has been the case over the past several years, only skilled advisors have been able to advance their clients’ portfolios. With both the stock and bond markets offering below average returns for the next few years, it will take a superior advisor to achieve above average returns. Using the past as prologue, your investing experience over the past two years indicates the competency of advice you will receive going forward. More than any time in the past 20 years, you will need a trusted advisor, with skill and experience, to manage your portfolio in the decade ahead.

Published in Westlake Magazine – February 2001