Counterpoint — A Commentary of Jurika, Mills & Keifer LLC
May 2009

Grieving Your Portfolio

By Karl Mills, CFA

A number of prospective clients who have come to see us with their portfolios are exhibiting the classic five stages of grief.

These stages, described by psychologist and writer Elisabeth Kübler-Ross in her 1969 book On Death and Dying, were meant to describe the emotional and psychological stages people go through in dealing with dying or the death of a loved one. These include Denial, Anger, Bargaining, Depression and Acceptance.

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Although the loss of a loved one is a far greater tragedy than the loss of wealth, they both represent catastrophic losses and the grieving process is often similar.

In both cases, it is important to accept that things have changed and that one can’t stay frozen in time. One needs to move forward, but with a new sense of direction and purpose.

And so part of our job is to help investors to understand their involvement in the grieving process, to avoid the psychological traps inherent in the process, and to clarify their thinking and priorities.

I. Denial:

“I just don’t open my statements anymore, or pay attention to the markets. It’s too depressing.”

This is one of the most common refrains we hear. Some investors hope that if they ignore the problem, everything will be fine. In addition, some argue that if they don’t do anything, then they have not really lost anything.

This is a dangerous self-deception. In many cases, investors and institutions that have lost substantial principal need to adjust their plans. They may no longer have an asset base that, based on any realistic set of assumptions, can allow them to meet their prior objectives. They may be incapable of withstanding significant additional losses, thereby requiring a more defensive asset allocation going forward. It is important to face these realities as quickly as possible.

II. Anger:

“I’m so mad at my advisor or myself.” Once they do open their statements and realize where they are, and regret actions they might have taken, many investors become angry. Perhaps they had an inclination to reduce their exposure to stocks last year and either failed to act, or were advised to “stay the course” by their financial advisors.

Anger and blame are understandable but not productive. Second-guessing yourself will not change where you are today, other than to offer some lessons in how not to repeat the experience tomorrow.

III. Bargaining:

In this phase investors are beyond anger and know that they need to move forward, but want to do so by striking a bargain with the market and themselves that will make them feel better about the outcome.

They want to get something back before they sell or reposition. Sometimes it is their cost basis – “I need to get back to breakeven and then I’ll sell.” Sometimes it is some arbitrary amount that will at least allow them to feel better about making a change. They don’t want to compound one mistake – not selling at the top – with another – selling at the bottom.

This is a very understandable sentiment, but approaches based on hope and ego rather than practical strategy tend to backfire. For one thing, it presumes that the market has bottomed and that the investor can withstand additional losses if they are wrong. More importantly, it presumes that the current portfolio is the one they should keep going forward. There may be better and more appropriate assets to own than the ones they currently hold.

IV. Depression:

“My portfolio is never coming back.” Investors in this phase of the process become anxious and depressed and are ready to throw in the towel. They may feel that they have failed as a provider or steward of family wealth, and jeopardized their future or that of their children. They lament the way things were and second-guess the many choices they could have made. They may still be frozen and incapable of action, or inclined to sell everything, abandon any kind of strategy and move to cash and the false sense of safety it offers.

V. Acceptance:

“I’m ready to accept where I am and move forward.” This marks the final stage in the process. It is an essential starting point for constructive wealth rehabilitation, and for better or worse, it is almost certain that there are things to be done.

Seven Guiding Ideas:

The sooner investors complete the grieving process and move forward, the better. The following are seven related guiding ideas to get people from Denial to Acceptance as quickly as possible.

1) Hope is not an investment strategy. Hoping that things will get better will not make them so. It can therefore be a big mistake to pretend that things are different than they are, wishing they might improve, without a reasonable basis for believing this to be the case, or without being prepared for them getting worse.

2) You are where you are. Your portfolio is what it is, and you need to recalibrate what that means relative to your life, your goals and requirements and what expectations and risks are realistic and acceptable.

3) The world has changed. This is not a typical downturn nor will the recovery be typical.

We are in the process of unwinding many years of over-borrowing and overspending by the U.S. consumer. This will take time. Factors that were major tailwinds over the past 25 years will now likely be headwinds. The future likely looks very different from the past.

4) The portfolio that brought you here is probably not the portfolio you want to leave with. You therefore need to make sure that your portfolio is not a reflection of what has been, rather than what will likely be. In addition, things may have changed in your own life that require changes to strategy, such as changes in employment status, the value of your home, etc… Your tolerance for risk may not be what it once was.

These factors all need to be factored into a forward-looking strategy. Every investment in your portfolio should have a purpose and a high likelihood of fulfilling that purpose based upon fundamentals and realistic assumptions about the future.

5) Doing nothing is doing something. Deciding not to do anything needs to be thought of as an active decision.

One clarifying question we ask is “if you had just gotten this portfolio today and it came to you all in cash, would you buy your current portfolio or would you do something different?” Don’t hold a portfolio you wouldn’t buy today, unless there is a compelling tax or other reason to do so.

6) Don’t invest on autopilot. The road ahead is likely to have many curves requiring strategic and tactical adjustments to your portfolio along the way. Factors are also likely to change in your life that require ongoing adjustments in strategy.

7) Seek good advice. Finally, get good, independent advice. A good financial plan is only as good as the assumptions it is built on. We have seen clients walk into our offices with beautifully produced financial plans and devastated portfolios.

If you use a financial advisor, make sure they are seasoned investment professionals who think for themselves and are acting on your behalf, rather than product sales-people or relationship managers.

Make certain your advisor’s interests are aligned with yours, and avoid “packaged” solutions, especially those that lock you in to a set path for a long period of time.

The most damaging thing about the grieving process is that it often involves a debilitating paralysis in one’s ability see clearly, to make important decisions, and to get on with life. This paralysis can be especially detrimental when dealing with financial matters.

We have found in practice that these guiding ideas provide an important framework to overcome the paralysis, clarify ones perspective, and set a new course to move forward with a renewed sense of purpose and confidence.

Jurika, Mills & Keifer, LLC
May, 2009

Important Disclosures

Opinions expressed are those of Jurika, Mills & Keifer, LLC, and are subject to change.

Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

This communication is neither an offer to sell nor the solicitation of an offer to buy a security or advisory services, which can only be made by the appropriate offering document.