Jeri’s Story – How Inexperience and Bright Lights Blinded the Way

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6/18/07

She was a hard working single woman, owned her own business, and seemed headed toward a comfortable retirement just a few years away. Unfortunately she became blinded by the bright lights of the ‘New Economy’ and technology boom. What she didn’t know is those bright lights shielded the horrors of a looming disaster, and she would not be able to extricate herself until it was too late.

I met Jeri at a class I was conducting on retirement planning at the local community college. She asked for a no obligation meeting and so at a later date we sat down to explore her needs and objectives.

Jeri was a middle aged small business owner and her most pressing objective was to assure a comfortable retirement, just ten years away. She had put away a fair amount of money into her small business retirement plan and now felt professional management was necessary as it was more than she felt qualified to handle, and it was everything she had.

She related the story of placing money with another financial advisor some years ago but felt she had been taken advantage of due to her own naiveté and inexperience. The prior advisor had placed her money in ultra conservative annuities and Jeri later learned the one who made out best was the advisor. Commissions were high, and returns were low.

This experience soured Jeri on the advisory profession so she took control of her money and invested in bank certificates for a few years. Because interest rates were relatively high her account grew in value very nicely. Things had changed however. Rates were low and Jeri had been hearing and reading about the excellent returns provided by the stock market and she wanted to take a closer look.

She felt comfortable with me due to the classes and also because I managed money on a fee basis; that is, my clients did not pay and I did not receive commissions. My compensation was strictly a quarterly management fee. She felt that was fair and removed potential conflicts of interest inherent in commission compensation.

We proceed to open Jeri’s accounts and placed her in our Moderate Risk, growth oriented management program. Things went well for a couple years and Jeri’s accounts grew in value, right within the range one would expect from a moderate risk portfolio.

I then began to field phone calls from Jeri suggesting we should increase the risk level of her accounts because some of her friends were getting much higher returns than she. She told me about another money manager who got 20% to 25% returns two years in a row, and the 13% per year we attained for her was no longer sufficient.

I told her I could not in good conscience move her to a higher risk level because everything I knew about her screamed moderate risk investor. Because she pressed the issue I said I could not do what she asked but she could certainly move her accounts to the advisor she was touting. And that’s just what she did.

Over the next few weeks I began receiving purchase confirmations of what her new advisor was buying for her. It was a mix up by the brokerage firm and I informed them of that fact and they soon fixed it. Meanwhile I recorded the purchases and tracked their performance over the next two years or so.

It was an unmitigated disaster. The portfolio was composed of relatively unknown (at least to me) small company stocks, and the account lost over 50% of its value through that two year period.

I just hope Jeri was able to get out and salvage the bulk of her portfolio, because I’m afraid many people did not. You see, the period I’ve described was 1997 – 1999 during the technology boom and later the bust of 2000 -2002 when she was with the other advisor.

I guess the moral of the story is to be certain the level of risk is suitable for you in everything you do. One of the biggest mistakes I see in the investment world is so many people take far more risk than is appropriate for them, and the irony is they don’t have to do it. There are many quality investments and investment management strategies that will get you where you want to go, and the journey can be made in relative ease and comfort.

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