SECRETS OF A FORMER FINANCIAL ADVISOR: THE MONKEY TRAP

The nature documentary footage shows a bare circle of earth surrounded by lush grasses, trees and brush. A monkey cautiously approaches the circle, where a coconut is tied by a rope to a stake in the center of the circle. A calm, semi-amused British voice explains that the coconut has a hole in it, just a little larger than the monkey’s hand and is filled with rice. The monkey picks up the coconut and shoves his hand in to grab the rice. However, when he goes to pull his hand out, it won’t budge. The handful of rice now makes his fist too big for the hole in the coconut. He could easily escape if he let go, but he doesn’t. Source: NLG


Don’t worry about our little monkey friend. He’s not on the menu, but he does know where to find water. The locals feed him salt–a tasty treat for him–so that when they do let him go, he’s so thirsty he leads them straight to the water.


This serves as a fitting parable of the consequences of not being able to let go, like with an investment that long ago gave up the ghost, but is still sitting in your portfolio. You know the one I’m talking about–it might have been a darling local company that has not displayed significant innovation–or profits–in years. It could be the stock tip you got from Uncle Fred, or the amazing trend you read about in the free paper sitting outside your hotel room door in the morning. I know about this last example personally, having read about a growing chain of dentist offices operated like fast food franchises. I was in the Navy and called my dad to buy 100 shares, then watched as the share price steadily marched lower over the years until it was no longer listed. I could have sold at any time, but I didn’t want to let go of the rice.


I should clarify here that I’m not referring to a portfolio that’s down due to economic and market cycles. Markets go up and down, as do investments. If there wasn’t that risk that investments would be worth less–often significantly less–for a long period of time, then investments wouldn’t offer the potential for reward that they do. You have to be comfortable with that amount of risk to even consider being in the market, and you have to have a long time frame for investments to be suitable. You also can’t ignore the possibility that a stock or even the market may never recover.


As we say in the compliance biz, past performance is no guarantee of future results. Yes, so far the market has recovered from each down trend, but it’s possible that there may come a day that it won’t. The dinosaurs and the Roman Empire existed for a long time, but not forever. But as I used to explain to my clients, if world events lead to the markets collapsing permanently, we likely have bigger problems. If you have the risk tolerance to invest in the market, it means you also need to have the risk tolerance to ride out down markets, have the time frame to leave sound investments intact while they’re down, and have other financial resources that are more liquid for your shorter term needs.


Having a financial advisor can be a huge help in staying the course and avoiding emotional investment decisions when the going gets scary. And in helping you find better uses for money that may be tied up in relic investments that your only rationale for continuing to hold them is that “You never know.”

Which is invariably what my clients said when I reviewed their portfolios, and found the one or two clunkers that were now worth little. My clients had no faith in the stock or the company anymore, but were reluctant to sell it. “Hey, you never know, it could come back” was a common reason, as was “It’s not hurting anything to hold it.” I would ask if they would buy that stock today, and of course they absolutely would not. But they didn’t see the connection that continuing to hold an investment is no different than deciding to buy it.


That investment may be worth significantly less than what you bought it for, but do you have other needs it could be serving? Your portfolio should be made up of holdings that you would buy more of given the chance. Here’s your chance! Make sure you work with your financial advisor and your tax professional so that you know how the loss will affect your tax situation. Now, take a deep breath, and let go of that rice.


Mark Bates is a Registered Representative and Registered Principal of Equity Services, Inc., Member FINRA/SIPC. Equity Services, Inc. is a registered broker/dealer affiliate of National Life Insurance Company, Montpelier, Vermont. Securities can be offered solely by representatives registered to offer such products through a broker/dealer.


Financial planning and investment advisory services can be offered solely through investment adviser representatives of a registered investment adviser. Investing involves risk, including the potential for loss of principal. No amount of time in the market can guarantee a profit, or guarantee against a loss.


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