Last week I wrote about an ad I encountered on Facebook about a trading program with phenomenal results. Results so good they could influence well-meaning investors to abandon their plan and chase the strategy (FOMO).
This week I focus on ads that pander to the other kind of investor fear, fear of loss. And it’s not just fear of loss, these days many investors fear volatility. We get uncomfortable with fluctuation and the uncertainty of how long it will last and how low it will go. We wish investments would achieve both good returns and minimal fluctuations – that would be the Holy Grail of investing. It would be financially and psychologically desirable. Unfortunately, it does not exist. But that doesn’t stop financial firms from playing on this illusion.
Obey The Laws
There is an immutable law in investing: there are tradeoffs between risk and reward. In other words you can seek growth or you can always feel comfortable investing. Since this is not a desirable outcome, we are subconsciously led to investment solutions that tell you it is possible – if only you invest in them.
In many facets of life we acknowledge and respect the laws of life, but sometimes it takes learning through sore experience.
A lean and attractive body is desirable by most of mankind. Years ago, certain pill makers claimed that no workout was needed and people could eat whatever they wanted. So long as they took this pill, they would not gain weight and remain fit. Since this is a desirable outcome, many were influenced by these claims. Years later, many health issues later, and most of us realize this is a complete joke and dangerous to our well being. Such products will still attract those that ignore the laws of nature, chasing after those things they wish that were true.
Financial Snake Oil
Several years ago I found this ad from the LJM Fund (see below). I was so concerned by the ad that I immediately notified members of The Behavioral Finance Network to be aware of what is out there and proactively address this kind of financial pornography with their clients. I also took screenshots of the marketing material, which I have below. Good thing, because a short time later (spoiler alert) the fund blew up and is no longer in existence.
This fund was not about achieving huge gains. It was about capital preservation and played on investors’ natural aversion to volatility. Look at the name of the fund – Preservation and Growth Fund. They were offering something that mocks the laws of finance/investing. Yet, because it was so desirable they found many investors willing to defy reality. With magic, the illusions blow our mind. With funds purporting magical outcomes, the only thing that is blown is the investor’s pocket book.
Perhaps the most ironic part of this situation, which would be funny if not so painful, was that the fund blew up during a period of heightened volatility in February 2018. The very markets they would “harness” blew them up, along with all their well-meaning, disillusioned investors.
I have often said the value of a financial advisor is not so much in the plan or portfolio. Many tools are available at very low cost for investors to do their own planning and finding a good investment model. The real value of an advisor is in helping the investor remain disciplined to their strategy and prevent them from blowing themselves up.
We are attracted to things we wish would be true. Not only are you the source of investment truth, you also need to be proactive in combatting the many falsehoods out there – before they grab your client’s attention and wallet. A reactive strategy is mostly ineffective when dealing with the psychology of people.