Oakbrook Solutions

I think there has been a profound change in investor sentiment regarding how they invest. Over the past decade, investors have experienced 3 calamities, which call into question the beliefs that formed the basis of their entire investment philosophy:

a) the tech meltdown, which over a decade later still has NASDAQ at levels 50% below its highs;

b) the housing meltdown, which by most accounts is the worst crisis in residential construction since the great depression; and

c) the financial meltdown, which has left the broader stock market indices, unchanged in 10 years

so, high tech, housing, and stocks in general do not engender confidence.

Computer hardware and software, the Internet (do you think that will last?) as well as, related products and services were valued in the early 00’s because it was believed that these factors would forever change the algorithm that existed between labor and capital. It was expected that these innovations would yield productivity increases, the likes of which have never been seen, and have a profound effect on corporate profits. Productivity growth has been strong but even the Internet could not re-write the laws of physics, so stock prices in high tech and Internet related stocks fell. Belief One – productivity gains resulting from the Internet and technology will change the way the world works – not quite.

I remember my father’s frustration with the fact that his youngest son rented his living space. He felt that I was making a big mistake by not building equity in a home. Today, my father, even though he has passed away, would be angry with lots of people. For the past 5 years the number of people renting has increased by about 700,000 per year while the number who have chosen the path of home ownership has fallen about 200,000 per year. It seems to be a rational decision if you look at the returns on housing investments over the long term – they are negligible. Belief Two – buying a home is a good investment since real estate always goes up – not quite.

Stocks over the long term go up. Evidence suggests that this is true if you have a pretty long time horizon. Since the end of the great depression, the return on the S&P has been about 6% annualized. What has changed is our notion of long term. More of us are Keynesian’s now who believe that in the “long run we will be dead,” so our time horizons have been significantly shortened. Belief Three – stocks go up in the “long term” – not quite given our time horizon.

So, how should investment professionals service the investor who now struggles to believe in anything? It seems in these perilous times that the only way this relationship can survive is if it grows closer. An advisor needs to understand their client’s way of being in the world if they hope to truly offer advice and counsel that helps them regain confidence. One way we have seen our clients try to enhance this relationship is by implementing and expanding the Trust Services they offer. This holistic type of arrangement allows an advisor to understand their client’s life at the level of detail necessary to help them achieve their objectives.

Contributing author: George Village, PhD