Sunday, April 16, 2023

The value of being consoled in market downturn

As I've been writing code to turn trading ideas into an advisor that any student can be trained to run, it is now time to review some financial advisory practices. 

For this new course, I've chosen a fairly high bar to beat. 

The 60/40 portfolio is a hard benchmark to beat and, in reality, more clients should be actually put into this portfolio rather than expensive products like ILPs. Bet recently as interest rates have gone up, the 60/40 is not a good place to be. I think at this stage, even the reputable FAs will kick in a process to up the level of hand-holding for the customer who is seeing double-digit percentage losses in otherwise safe bond ETFs.

For those who hand over their wealth to experts, maybe they actually enjoy the hand-holding, I will not fault that. 

But what if you expect more from the industry? 

Well, the truth is beyond hand-holding, the best advisors would rather you stay put. There are strong financial incentives to sit this out. There is a strong belief that the 60/40 portfolio will rebound.

For folk who DIY, there is no one trying to stop your funds from fleeing, so there is the possibility of learning about market edges that can do beyond the 60/40 portfolio. 

Based on my investigations, traditional portfolios are 60/40 and can produce one unit of return for two units of risk, which is admirable. But armed with a number of market edges, it is possible to do better, maybe 1.5 units of risk to 1 unit of return, or even 1 unit of risk to 1 unit of return. This would generally higher ETF turnover, but these days we have very cheap online brokers to play with. 

Even if you do not achieve these gains, you are in essence earning your own commissions and fees, which is not insubstantial.

I won't spend too much time talking about what sorcery I am working on. I'm still writing out the preview of the sales workshop.

I like to leave you with some final thoughts about financial advice with respect to the value of empathy and consolation. To do that, I subscribed to ChatGPT and got it to write a consoling email to a client who lost money. I added a nice touch on interest rates.

Dear [Client], I'm sorry to hear that your portfolio has experienced losses over the past year. I understand how frustrating this can be, and I want to assure you that I'm here to help you navigate these challenging times. While short-term market fluctuations can be difficult to weather, it's important to remember that investing is a long-term game. Over the long run, markets have historically rebounded from downturns and provided investors with solid returns. While we can't predict exactly when this will happen, I believe that we can remain optimistic about the future. In addition, it's worth noting that high-interest rates are unlikely to last indefinitely in this economic climate. While they can present challenges for investors seeking yield, there are signs that interest rates may begin to decrease in the coming months or years. This could present new opportunities for investors as market conditions shift. In the meantime, please know that I am constantly monitoring your portfolio and making adjustments as needed to ensure that it remains aligned with your goals and risk tolerance. If you have any questions or concerns, please don't hesitate to reach out to me. Thank you for your continued trust in me as your financial advisor. I look forward to working with you to achieve your financial objectives over the long run. Best regards, [Your Name]


  1. 60/40 is only hard to beat if (1) you're pressured by quarterly performance reporting to "beat the benchmark" (i.e. career risk & short term bias), or (2) don't have more than 30 minutes in each year to bother with your active portfolio (30 min a year is basically the effort it takes to maintain & rebalance the 60/40).

    Else being able to spare 1 hour each month is more than enough to beat the 60/40 over the medium to long term using unemotional quantitative techniques like 10-mth moving average or dual momentum.

  2. Thank you ! At least I know some folks understand what I'm driving at.