We have talked before about what to do when a client fails to take advice. Today let’s look at that from another angle, a cautionary tale for diversifying investments.
Some time ago, a new client came on board. This client had a mix of investment accounts, including savings, brokerage and retirement plans and a net worth of investable assets well in excess of Michael Fisher’s targeted minimum (half a million if you need to ask). One particular security held place of pride in the client’s retirement plan account and accounted for close on forty percent of his total investments.
Now this client had invested carefully and well in that one security and on paper had some pretty impressive gains. We pointed out the obvious, mentioning the impact of volatility on stocks in general and the track record of this particular security, which had been prone to significant moves in share value from time to time. The client was happy with the security, though and declined to make any changes.
Our advice became more pointed, noting that if things did not go well, the client could fall behind in meeting his goals for retirement and the family financial future. Selling a portion of the holding, we said, could lock in some of those tremendous gains. The fact that there would be no immediate tax consequences for a sale – in the qualified retirement plan – was also mentioned, all to no avail.
The market runs its course and we, and the client, watched hundreds of thousands of dollars of paper value melt away. Now the client said, I must stay with this investment. It will go up again and I cannot afford to take a much smaller gain today. Will the security recover? We don’t know, of course, but this client could easily have sold a fifth or a quarter of that holding and invested those gains in other securities, saving that growth from the meltdown which occurred. At the very least, there would be less overall stress to the client and his portfolio and he still would be participating in that special security, taking advantage of its volatility and potential for future growth.
The client now has accepted advice to keep the rest of his investments better diversified and to allow us to factor in the risks of the outsize position in his allocation. It will be interesting to see how things develop and we hope that there is not too much excitement of the negative sort coming along. This client has learned something - let us hope we all can not only learn but apply the knowledge to our investing.