Not long ago, I was having a difficult conversation with a client. This woman would not listen to reason, and despite my best efforts, I was about to lose it.
“How many times have you heard me say it?” I told her. “You made a good investment; the stock has had a good run. But now, because of that, you’re overweighted. You need to take some gains off the table and reallocate that money so you can stay within the guidelines we’ve set up for you. And it’s in your retirement account, so you don’t even have to worry about the capital gains. What’s the problem? Which part of this do you not understand?”
I was really laying it on thick. And I was right! We had clearly established our ground rules for asset allocation. But the client had wanted to make a play on one of the FAANG stocks; it seemed very important to her.
Reluctantly, I helped her make the buy in her IRA. We had set a firm limit of no more than 10% allocated to any individual stock, and she understood that. But with the big rise in price she experienced, the stock’s value was now way outside the boundaries for any individual holding. It was time to sell. Why was this she refusing my advice?
Possibly because in this case, the client was me.
I sat there, staring at my screen, knowing I needed to hit the sell button … and I couldn’t do it. As I continued to broil in my own indecision, the tapes of previous client conversations started playing in my mind: “But the price is still going up!” “Why would you sell a winner?” “I read all the material on the stock including an article in Forbes that says it could go even higher!”
I had heard it all before from the other side of the desk, but now that I was my own client, I was finding it much harder to follow my own advice.
Fast-forward: I did ultimately sell the position and reallocate the money. To sweeten the irony, the next day my darling stock experienced a major sell-off. I got to simultaneously cash out close to the top (at the time) and dodge a bullet.
But I’ll never forget how hard it was to pull that trigger. I remind myself of that every time I sit down with a client who is eager to cash in on a major payday with one of the FAANG stocks. With all the hype and glamor that attends these five technology giants — Facebook, Apple, Amazon, Netflix, and Google — it’s not hard to see how even savvy clients can become dazzled.
So how do we offer sound counsel to our clients and also permit them the opportunity to take a profitable flier from time to time? I believe, as with most things in life, the answer lies in a thorough knowledge of the client. A sense of proportion and discipline is also invaluable.
Part of that essential client knowledge is understanding the magnetic pull of the big score. Like all human beings, our clients experience greed — the temptation to let all the chips ride just one more time.
I certainly felt that pull as I looked at the gain in my IRA account. Because I know how it feels, I can explain to my clients that no emotion — especially that lust for the big win — is a valid basis for making long-term financial decisions. I remind them that we have to focus on what we can control: allocation, expenses, discipline and structure. Research has shown that individuals don't pick stocks any better than choosing them by throwing darts at a dartboard. So I don’t try.
All that said, making a pure play in one of the FAANG stocks with a preset portion of portfolio assets can make sense for certain clients. But this is where a sense of proportion becomes important. When I determine that a particular client fits that profile, the first thing I do is set a limit of 10% not to be exceeded in any one individual stock.
Why 10%? This relatively low percentage of assets protects the client from most of the consequences of lousy market timing — which is unpredictable — while still affording enough skin in the game to make the experience meaningful.
Next, we set a firm upside target, at which point we agree in advance to take profits and reallocate according to the client’s asset allocation plan. The idea here is to allow the client some room for the stock to run without violating the investment integrity of the allocation we’ve put in place.
Let me be clear: I’ve been a fan of Google and Amazon, and even Apple, since the early days; I’ve even bought them in my son’s Roth IRA account and, as I mentioned, in my own IRA. (Personally, I’m less enamored of Facebook and Netflix). But even though my son has a lot of years available to recover financially if one of his FAANG holdings goes bust, I’m still not going to violate the guidelines that we’ve put in place. As a wealth advisor to my clients and myself, how can I expect my clients to follow my advice if I don’t walk the talk myself?
And so, this brings us back to where we started. The ancient proverb, “Physician, heal thyself,” seems very applicable here. Before we start lecturing our clients on the pitfalls of being over-enticed by the big tech stocks, we need to take stock of our own tendencies.
The advice we give to our clients has real-world ramifications, and no stock goes up forever. It may be fine to let that occasional client take a flier on Apple or Amazon. But set your limits, both going in and coming out.
And remember: Pigs profit, but hogs get slaughtered. Especially if the client is you.
