These days there are more varieties and combinations of investments than selections on a Starbucks menu -- but that's not necessarily a good thing

August 2, 2012 — 4:14 AM UTC by Guest Columnist Rob Isbitts


Investing today is so very different from in the past, isn’t it? You don’t need to visit a Quotron to see how your stocks are doing. Just look it up on your computer or your smartphone. Stocks are no longer traded in eighths of a dollar, but in pennies. Many investments you used to buy directly can now be accessed through ETFs, structured notes and even CD-like instruments. Hedge funds and investments like hedge funds can be owned by anyone, not only the superwealthy. See: How one big contrarian money manager is gearing up for 2012.

And remember when diversification meant growth, value, small-cap and large-cap? Now, you can invest in emerging markets, dividend-paying stocks, bonds from Africa and commodities that only farmers and professional speculators used to traffic in. Heck, clients can even tell an advisor they would like a double-long, midcap equity ETF. To the uninitiated in Wall Street’s new lingo, that could be confused with something that you would order from a barista at Starbucks. “Can I have that with soy milk?” “Yes, but only if you buy the inverse agriculture ETF with it. You see, that way you greatly reduce your exposure to cows in the portfolio, which allows us to allocate more to dairy alternatives.” See: How 5 seriously overworked buzzwords can come between you and your client.

As advisors and their clients persevered through the previous decade (I don’t even know what we are supposed to call it — the ’00s would be appropriate, since the name approximates the return of the broad U.S. stock market over that time), a new type of investment vehicle rose to prominence. Naturally, I am talking about exchange-traded funds. Evolutionary, revolutionary, and as alluded to before, potentially complex enough at times to make you think about an iced-decaf-soy-mocha latte. ETFs seem to have stood the test of time and it appears they will be a staple of the investor’s and advisor’s diet for decades to come. So too, have SMAs and mutual funds secured their place in many portfolios. In other words, there is room for all of them.

Investment of the decade

OK, before you start to accuse me of going all Andy Rooney on you, here is the point — investing has changed a lot, but simply because you have more selection, it does not mean that your basic needs as an investor are any different from those of investors 20, 30 or 40 years ago. That’s why the investment vehicle of this decade is one about which, by the time the “Teens” end, we will look back and say “Wow, that form of investing really came a long way from where it started the decade.”

What’s the investment vehicle of the decade? It is individual stocks. You may just not realize it yet. Let me explain why I think that for the first time since the 1970s, investors and advisors will gradually beat a path toward portfolios that at their core contain individual equities. See: It’s a rent-and-hold market for stocks.

1. Everybody out of the pool

There are so many “pooled” investment products that the danger of oversaturation of the investor exists (and so too for the advisor, who tries to keep up with all the new inventions, only to feel like as soon as they buy something, its yesterday’s news). You might summarize this by saying that when everyone’s in the “pool” its time to start thinking about getting out. It could get dangerous in there. By no means am I saying that mutual funds and ETFs are not viable investments. I think they are. But Wall Street has a tendency of feeding its audience more and more of the same thing, until it explodes like the large fellow at the end of Monty Python’s movie “The Meaning of Life” (if you don’t get the reference, don’t worry … its quite grotesque). See: Why many RIAs should start a mutual fund, considering the limitations of SMAs.

2. Getting paid to wait

Stocks offer what baby boomers and retirees badly need at a time of pathetically low interest rates and the specter of inflation down the road: income that can potentially rise over time. In a prolonged stagnant economy, I would expect dividends to take on a far more meaningful role for investors than they have for decades. Many public companies are raising payouts by 5% to 10% or more year after year. The S&P 500 yields about 2%, but my research shows that 4% to 5% or more is achievable in today’s market without simply buying utility stocks. That’s a great starting point in a market that has not provided a lot of sustained bullish activity for a long time. Until it does again, it’s nice to get paid to wait. And if dividends continue to enjoy their relatively favorable tax treatment (i.e., 15% tax rate) into 2013 — granted, a big if — the story will get even better. See: The 10 most likely contributors to the next market panic.

3. Flexible flier

A portfolio of individual stocks can be hedged. For instance, if you own a group of stocks and understand what is likely to influence their movement, you can hedge with an inverse ETF. In combination, you have a “net equity exposure” you can adjust as your market outlook changes.Thanks to the flexibility of ETFs, stock market risk can be managed better today than in decades past. Inverse ETFs and even options (which have also gone more mainstream), can be used as effective volatility modifiers alongside an equity portfolio. That assumes that these relatively complex tools are being used by experienced hands. The idea of maintaining an above-average yield but having the flexibility to clamp down on price movement at times of great market stress is a potentially powerful combination, and one that road-weary advisors and their clients are likely to discover with increasing intensity over the next several years.

4. Back to basics

Individual stocks can be less expensive to own. Unlike funds, they don’t have expense ratios and continuing trading costs. It seems that a more critical and cost-sensitive public, who pay more attention that ever to expense ratios (witness the popularity of Vanguard and Dimensional Fund Advisors funds), will appreciate your increased focus on keeping nonadvisory costs low. Combine this with potential cash intake from dividends, and you can make a good argument that lower costs and that income represent “alpha” you created for them, simply by adjusting their investment strategy for the realities of today’s market. And who doesn’t love a proactive financial advisor.

To many, Wall Street is now a synonym for greed. I think that perception is driven in large part not by actual greed, but by complexity. Bad actors on Wall Street get big headlines, and headlines sell. But those of us in the advisory business realize that there are plenty of hardworking, honest members of our profession to go around. So, what may be driving a lot of the resistance toward investing is not the old concept that the market is rigged in favor of the rich and powerful, or that the world thinks everyone with a CFP or CFA is out to get them. What gets them is that they are confused by what investing has become, and perhaps intimidated by the complexity of it all. See: Buy alternative investments and get over Madoff, especially as interest rates threaten to rise: columnist.

5. Comfort food

Finally, there is the aspect of familiarity. Show a client a list of portfolio holdings with names like “Disciplined Growth,” “Lifestyle 2025” and “Alternative Alpha” and they are likely to tune out and miss the point of what you are trying to do for them. They will check out emotionally and not identify with what their life savings has been placed into. But show them a list of real, live companies, including some names they may know and industries they feel strongly about (as investors, people, or both), and I think you have a better chance of having spirited, productive consultations at all stages of the relationship. See: The 4 biggest investment performance myths — and how they can torpedo advisor-client trust.

If I am even a quarter right on this, the idea of constructing a portfolio whose leading role is played by a focused set of individual stocks, managed actively but not like a trader, would be a source of renewed confidence for both investor and advisor. And, if this approach is accompanied by some regular communication and hand-holding by the client’s trusted advocate — his or her financial advisor — the upside potential for client-advisor relations is enormous.

It could even reverse what I have said for years is one of the most unfortunate by-products of the Internet and mobile age — the shriveling up of investor time horizons. It used to be that three to five years was an appropriate time to judge the success or failure of an investment program. Now, I think some advisors and money managers just hope to get by the first quarter of a new relationship or investment without a discussion of investment performance. A patient investment environment is easier to create when the investor is made to understand what is happening in the portfolio, why it is happening, and what perspective should be drawn from it. See: Of Trumpets and Tulips: Is time diversification a myth or reality? Does time horizon affect the tolerance for risk?.

We know it’s a gotta-have-it-now world we live in. But we can spend more time educating clients about what they own and how it fits with their true financial objectives (e.g., “maintain my lifestyle” instead of “beat the S&P 500”). If we do this, and spend less time trying to deliver instant success from what is truly a multiyear project (to many of us money managers, at least), we will revolutionize the way clients and advisors interact.

Or will we? Sure, it will be a great day when this happens, and I think it will. There is just too much built-up hostility over the past decade-plus of market crises and questionable Wall Street behavior. But “revolutionize” is probably not the word to use. After all, if you believe as I do that while ETFs and mutual funds deserve to be included in the mix, but individual equities at the core is the way to go, that’s more of an evolution following decades of dominance by pooled products. And really, all we’ll be doing is adapting today’s fee-based, consultative, fiduciary-driven industry to what stockbrokers and clients did way, way back in the 1970s.

_Rob Isbitts is the founder and chief investment strategist of Sungarden Investment Research LLC, and offers advisory services through Dynamic Wealth Advisors. Rob is a 25-year investment industry veteran, author of two investment books, creator of several portfolio strategies, and a former chief investment officer and mutual fund manager. He currently advises a limited number of high-net-worth private clients and provides outsourced investment strategy and research services to financial advisors from South Florida. Rob can be reached at His new blog site can be found at

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