Tag Archives: 2008

So What Really Is Good Advice?

 

 

Podcast Transcript

 

The markets are hitting new highs. But my advisor says, “Think long term”. I asked him if we need to book some profits. He says  “Do nothing, just let the investments stay.”

Friends, keep bringing up these conversations more frequently these days.

The problem with giving advice in the best of times is that it may actually alter the financial well being of advisors. Actually, it can destroy the advisor’s incomes if what is good for you is actually done.

So there is a tendency to actually give you advice which is innately conflicted. The advisors interests and yours tend to be in deep conflict. Ironically, as your investments start to perform to their peak potential, this conflict only worsens.

The most simple thing to do is to sell and go away. But, the advisor won’t tell you to do that. Instead, he would most likely make you sit and watch your portfolio fall. The advise every advisor fails to give you at the right time is the very advise that every investor would have most badly needed.

Selling and going away is just one way. It is not the only way to do it. There are better and smarter alternatives. But before we judge the smarter options, let us understand what not selling out at the right time would mean to you and your advisor.

So what is the advise likely to turn out for both parties?

 

Here is my best case argument.

The best case verdict is Good for the Advisor. And not all that bad for you.

The worst case is obvious. Good for the advisor. Very bad for you.

 

If you invested on good advice and were early to the tech boom of  2000 or the infra boom of 2008, and the advisor simply failed to make you sell when your profits were swollen and peaking, you fell under the worst case scenario.

Valuations will always be the markers. The markers must drive decisions. When the markers warn you, you have got to sell.

The long-term can wait. The immediate response is to advise you to safety. Remember, the long-term has never been as good for tech or infra since 2000 or 2008. I am sensing a similar mood in two spaces in the current market. The marquee private banks and financials is an obvious one. The not so obvious space in the midcap space. The valuations have long been running above the long-term sell markers.

This is the only thing both advisors and investors must respect. MARKERS don’t lie,  especially valuation markers. I am convinced good advice must walk you out of extremely overvalued parts of the market. If not, you will be a spectator during the bad times.

And it is not as if there are no alternatives. There are plenty of alternatives good advice can offer. If an advisor says there is no alternative to owning extremely expensive equities, then it possibly is just one of the two – lethargy or ignorance. The worst case is, that it can be both. Surely as an investor, you can’t afford to let your future be affected by both.

This is a time when we need to call our investing to sensible action. Good advice needs to call those actions of you. If it is dormant or passive, you need to question whether that is actually good for you. If you fail to question such advice, you will sow the seed of serious regret.

Good advice is simple. Investments which are seen as worth holding now must be GOOD FOR YOU. GOOD FOR THE ADVISOR.

Sadly, a whole lot of such investments which looked so in 2014, actually don’t look good for you anymore. So you need to know what good advice is and actively seek it out. Mediocrity can hurt all the good work you did in the past few years.

The Legacy of Janet Yellen

 

Janet Yellen took over as Fed Chair in February 2014 at which point she had already been with the Fed for a decade. Although no new financial crises occurred during her term, the job at hand was no less tricky. Yellen inherited the responsibility of reversing the quantitative easing (QE) program shortly after her predecessor, Ben Bernanke announced to taper it.

To put it simply, the QE program was used to combat the 2008 financial crisis. It injected liquidity into markets by buying debt securities. Effectively, the supply of money increased, and the cost of borrowing fell rates to near zero levels. Low interest rates were meant to stimulate economic growth. However, they had associated costs. Firstly, surplus liquidity could trigger inflation. Next, citizens were earning less from their investments. Lastly, there was a risk of another asset bubble building up, leading to a new crisis.

During her term, Yellen employed a cautious, planned, and calculated approach. Her focus was on bringing unemployment down. She avoided rash interest rate hikes by understanding that surplus liquidity would not result in runaway inflation. Rate hikes were conducted in a phased manner and the economy was prepared for each one. There has been a certain finesse and sense of judgment to these decisions.

It is often believed that a longer tenure would allow central bankers to act in the long-term interests of the economy. Yet, in her single term, Janet Yellen has managed to bring down unemployment to a 17-year low, keep inflation below 2% and economic growth at 3%. This shows promise of continued progress. Her successor, Jerome Powell, is likely to follow a similar approach, even if he entered at the start of a market correction.