In a recent story, Rob Carrick wrote about Gerhild Somann, a 67-year old investor, who was angry at receiving a letter from Franklin Templeton, which talked about the bargains in the market today. The investor was instead looking for “empathy” and felt that the investment community lacked “prudence, watchfulness and responsibility”. The column mentions that Ms. Somann’s portfolio lost 25 per cent in 2008 but she is not “mad” at her financial advisor.
It may sound harsh but Ms. Somann’s anger should be channelled elsewhere. I have no idea what her portfolio looks like but it does seem that she may have taken on more risk than she is able or willing to handle. Even if Ms. Somann had a traditional 60 per cent / 40 per cent split between stocks and bonds, she would have been down by roughly 17.24 per cent. A good case can be made that such a split is still very aggressive for an investor who is nearing 70. If she had adhered to the “age in bonds” rule and kept 65 per cent in bonds and the rest in stocks, her portfolio would have lost just 7.39 per cent.
A 25 per cent loss suggests that her portfolio was far too risky. How is that Franklin Templeton’s fault? Instead of blaming the mutual fund company, Ms. Somann should be grilling her advisor why she has taken so much market risk when clearly she doesn’t have the ability or the stomach to do so. Clearly, her case isn’t unique. A lot of financial angst reported in the press can be traced not to poor stock market returns but to an inappropriate asset allocation policy. Investors who put a portion of their portfolio in stocks should keep in mind Benjamin Graham’s advice that stocks prices will fluctuate:
In any case the investor may as well resign himself in advance to the probability rather than the mere possibility that most of his holdings will advance, say 50% or more from their low point and decline the equivalent one-third or more from their high point at various periods in the next five years.
