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What’s Your Investment Personality: Loner, Follower, or Zombie?
Three Investment Profiles
Few investors neatly conform to a single description. As with heritage, most people have blended traits. (Although not all: My wife’s ancestry report reads “99.6% Eastern European.â€) But there’s no question that personalities affect investment behavior. This article outlines the strengths and weaknesses of the three prevailing mindsets.
Loners
Investors who belong to this group make their own decisions. They consume investment research neither for its counsel, nor to learn what others are doing, but instead as grist for the mill. Such investors ignore the actions of the crowd. Should they see a line snaking around a block, they will not try to learn what they are missing. They will instead go on their way while pitying the line’s occupants.
Strengths:
1) Buying Low
Loners are not the only investors who try to buy low. Stock mutual funds sometimes receive inflows after market declines because the overall marketplace believes that the dip presents a buying opportunity. Overall, though, loners are the likeliest investor type to sift among discounted securities, seeking bargains.
2) Early-Bird Gains
Besides receiving “dead cat bounces†from securities that are deeply depressed, loners may also profit from the opposite form of investment: highly expensive emerging-growth stocks. Before Tesla TSLAwas mainstream, it was owned mainly by iconoclasts who discovered its story. The same holds for all winning startups.
Weaknesses:
1) Self-Delusion
Unfortunately, not all that glitters is gold. For each dollar they stashed in Tesla or bitcoin, loners squandered thousands on investment dreams that never materialized. Sometimes, wisdom does in fact lurk within the crowd. Loners constantly face the possibility their “insight†is instead self-delusion—the mistaken impression that they have spotted what others missed.
2) Bear Traps
A related problem is bear traps. This error has happily become less frequent, because market-timing has become unpopular, but loners nevertheless tend to exit the stock market, believing they have identified an upcoming bear. (A little knowledge can be a dangerous thing.) Once out of equities, they have trouble getting back in, because doing so before stock prices collapse would be a tacit admission of failure. Loners do not always benefit from having large egos.
Followers
More common than loners are followers, who derive comfort from crowds. Rather than walk past lines, they join them. Followers are strongly influenced by recommendations—from researchers, the media, friends and family, and internet boards. They seek investment allies.
Strengths:
1) Staying Informed
Followers listen to others. Doing so helps to keep them knowledgeable about investments, thereby reducing the chance of an unpleasant surprise. As with inflation, which causes the most damage when it is unanticipated, unforeseen investment losses carry the sharpest sting. Followers who listen to both side of the investment debates—which, it must be confessed, does not always occur—are well prepared for bad news.
2) Trading Opportunities
By the time that followers learn of an investment possibility, the loners have already found it. Word takes time to spread. Astute followers, however, may still reap ample profits by arriving before the rest of the marketplace. Discovering Tesla in winter 2020 was too late. But buying the stock two years before, when it was well known but not yet the investment rage, would have been a splendid trade.
Weaknesses:
1) Tail Chasing
A fine line separates being guided by the collective from being controlled by it. Those who appropriately use investment information, by applying common sense and at least a modicum of their own judgments, can prosper. Not so those who become bewildered by the investment gossip, turned this way and that, like dogs distracted by a fluffle of rabbits. Such is the constant danger for followers.
2) Mob Mentality
Followers are the most prone to being harmed by their emotions. As anybody who has participated in internet forums can attest, chat groups can quickly become mobs. (Whenever I receive an openly insulting email, I know that my column has been posted on a Reddit board.) Investors may benefit from hearing additional views, but rarely will they succeed by sharing others’ emotions.
Zombies
Most investors are zombies. The less they know about their portfolios, the happier they are. Consequently, they tune out the noise. Back in the day, that meant owning a portfolio that had been assembled by a stockbroker, and then leaving future decisions in the broker’s hands. These days, zombies are typically 401(k) participants or index-fund proponents. Either way, they stand aside.
Strengths:
1) Investment Discipline
This one is obvious. To the extent that investment success comes from staying the course—a hoary cliché, but not without truth—zombies are perfectly situated. They possess neither the faith to make their own adjustments, nor the interest to copy other investors’. Their portfolios therefore tend to remain unchanged.
2) Emotional Control
In the 1990s, many investment experts speculated that when the long-awaited bear market finally arrived, 401(k) participants would be the first to sell, given their inexperience. They were instead the last. During the technology stock crash of 2000-02, 401(k) assets were more stable than either retail investors’ taxable accounts, or the portfolios run by professional managers. There is an advantage to lacking an investment brain.
Weaknesses:
1) Missing Out
Although zombies will neither become ensnared by bear traps nor chase their performance tails, neither will they spot investment opportunities. To return to our previous example, some people bought Tesla before the company joined the S&P 500 in late 2020. They might have been loners, or they might have been among the earlier followers. But they assuredly were not zombies.
2) Structural Changes
Over the long haul, the markets are very stable. Roughly speaking, bond yields increased for 30 years, from 1950 through 1980, before subsiding over the next three decades. That made for one inflection point during the Depression generation’s investment lifetime. The long-run performance of equities has been equally predictable. Thus, structural changes rarely leave zombies behind. When such shifts do occur, though, zombies are the last investment type to know.
What You Need To Know About The Follower Investor Personality
Individual differences in characteristics and behavior manifest themselves in investing decisions. When you opt to invest, you must commit your resources and wealth to the venture and understand your investing nature and behavior. People with the Follower Investor personality are passive and follow their friends and peers, as well as current trends, and invest because it is being done by “everyone.â€
5 Traits of the Follower Investor Personality
1. Carefree Attitude
Followers have a relaxed and carefree attitude towards life. They trust others and can be easily convinced. Such investors are sociable and get along with people. Their trusting quality also attracts many friends and a broad network of people. However, this quality may cause trouble when they make faulty investment decisions.
2. Passive Nature
Because of their carefree approach to life, follower investors are not genuinely interested in investing, so they need to be influenced to invest. They are motivated by other people, such as their spouse, a friend, salesperson, or relative. Their lack of interest in investing may prevent them from conducting due diligence. A follower in such a situation will incur losses when things fail.
3. Keeping Up With the “Jonesesâ€
Another reason these investors are called followers is their need to keep up with others. They want to be involved and not left out. They feel they should share in the investing journey towards financial freedom. This trait encourages them to seek financial advice from everyone—family, friends, and those who seem to know about investments—everyone except professionals.
4. Easily Misled by Information
Followers have sources they implicitly trust; therefore, they are susceptible to believing false or unverified information. If the information sounds logical and true, a follower is likely to act on it. Follower investors are described as people with a herd mentality—investors waiting to hear about a lucrative opportunity and impulsively invest. Investment ideas are even more appealing to them if people try it and are successful. Followers are led by impulses rather than reasoning and critical thought. If someone has an idea, they will try it.
5. Lack Long-Term Investment Plans
While others are interested in long-term planning and thinking critically about an investment idea, a follower does not see this as essential. A lack of planning often causes followers to miss out on an investment’s full potential. A lack of determination often causes followers to miss out on opportunities. They do not see the value in seeking opinions from professional financial advisors.
Positive Attributes of Follower Investors
Flexibility
Followers are flexible in their thinking and actions, which allows them to follow others in the investment markets. This trait benefits them when lucrative opportunities arise. They will be willing to take them, especially if financial advisors verify their viability. For example, followers often purchase or build commercial property in a developing area on the assumption that “everyone is doing it.†Although not all investment opportunities are promising, followers are willing to take a risk and join the investment bandwagon.
Agreeableness
In the five-dimension personality model, followers are likely to be agreeable or open people. Such people are accommodative and can make good investment partners. It is easy to reason with and persuade them to consider a specific investment opportunity. They are trusting and do not have many rules governing their lives. If an investment idea sounds logical and beneficial, they will pursue it.
Open-Minded
Because followers have an open mind, they have the potential to accumulate wealth. They can gain success by following people with new ideas. They may not be particularly interested in investing, but whatever excellent opportunities they choose will be rewarding. A follower is not keen on making long-term plans for investments. This issue can be addressed later, especially if an investment offers good returns.
Excellent Team Players
Followers make ideal team players in group investment planning. They will support good ideas others suggest because they are not initiators. While it is usually difficult to gain consensus while working in a group, followers make that task seem effortless. Followers are more relaxed, carefree, and happy. This attitude is vital for dealing with stressful investment situations, and they can boost an investment group’s morale. Followers remain composed even in a crisis. Flexibility and openness are important traits for people who enjoy new experiences and adventure in the investment world.
Shortcomings of Followers
Exposed to Risks Due to Herd Mentality
A herd mentality can be risky, especially in situations involving scams. Followers do not consider and evaluate their decisions; they are ready to plunge in because the crowd is doing it. That is how investors have lost their money in Ponzi schemes or duped by high-yield, quick-return ideas. Eventually, they experience losses by making such decisions.
Poor Planning
A follower may have an excellent opportunity to invest but does not reap the benefits because of lack of planning. For example, purchasing stocks or shares is a good idea, but an investor should have a plan. Most followers who choose this idea get minimal yields because they lack strategy. Others miss opportunities for buying or selling because they lack knowledge about the purpose of and need for planning.
Avoiding Due Diligence
While followers may benefit from flexibility and openness, the same traits increase their chances of incurring losses. Followers rarely conduct due diligence when presented with an idea. When followers implement a bad investment decision, they experience losses because they did not thoroughly evaluate their choice.
Follower investors generally do not take the initiative and create new ideas, significantly hindering their potential to use their abilities. They may not be interested in investments, but even a little effort would make a significant difference. Lack of initiative can become a weakness in their lives. Followers are capable of mitigating their limitations as investors by researching and performing due diligence.
Lessons from Dolly Khanna’s portfolio building
Dolly Khanna is not your average investor, but she has managed to become a multi-millionaire literally without even lifting a finger.
No, we are not leading you down any random rabbit hole. Mrs. Khanna is a senior citizen home maker, whose portfolio is managed by her IIT Madras educated businessman husband Rajiv Khanna. Mr. Khanna, who began investing in the stock markets only in his 50s, has managed to get multibagger returns of the sort that some of the most established investors can only dream of.
The Khannas owned the famous ice cream brand Kwality Milk Foods, which they sold to Hindustan Unilever in 1995. It was only around 1996-97 that the now 77-year-old Mr. Khanna entered the market, albeit not directly but via his wife’s brokerage account.
To be sure, the Chennai-based Punjabi husband and wife remain low-key and rarely do they talk openly about their investment thesis. But if we look at the publicly available information on their stock market portfolio, there’s enough that we can glean from it.
How much are the Khannas worth?
The Khannas prefer buying shares in stocks that are not that popular, but ones that typically go on to perform very well in the markets.
Over the last few years though, they seem to have reduced their exposure to the direct stock market and seem to have moved their money either into mutual funds or other asset classes.
Public data shows that as of the end of September 2024, Dolly Khanna owns stakes of 1% or higher in 17 stocks, with a cumulative market value of more than Rs. 505 crore. But this does not include those counters in which she holds less than 1%, so the actual value of her stock holdings could be much higher.
Market sources, in fact, put the value of the Khannas’ total corpus at a much higher Rs. 1000 crore or even more.
But the value of their corpus is hardly the point. What matters is, how they got here.
The Dolly (Rajiv) Khanna school of investing
One of Rajiv Khanna’s first successes was real estate company Unitech Ltd in which he invested Rs. 5 lakh in 2003 and harvested Rs 25 crore from the share, in a matter of just around four years.
The Khannas seem to have a simple investment philosophy. They want to capture growth opportunities in the small and midcap segments.
They have managed to make big money on small caps like Nilkamal, Rain Industries, Avanti Feeds, Pondy Oxides, Monte Carlo, Simran Farms, Deepak Spinners, Control Print, Som Distilleries, Talbros Auto, Prakash Pipes and Nitin Spinners, just to name some.
Some of the other small caps that they have been invested in, include Asahi Songwon, Butterfly Gandhimathi, J Kumar infraprojects, Polyplex Corp, Shemaroo, Sharda Cropchem, Goa Carbons, Sharda Cropchem, Zuari Industries, Rama Phosphates, Indo Tech, Ajanta Soya and Aries Agro.
The Khanna portfolio shows that not only are they looking for undervaluation but also for companies that can grow their sales and profits quickly. They are typically eyeing a 15% of higher topline and bottomline growth, along with robust future growth prospects.
But this is not all. What is perhaps even more important is the type of companies the Khannas prefer investing in. They typically do not invest in banks and financial services, technology or government owned companies. Instead, they focus on textiles, chemicals, rubber, automotive and manufacturing companies in their portfolio. They seem to give a higher priority to companies that deal in products and services that they can see being used around them.
For instance, Mr. Khanna, invested in Unitech when he was looking around to buy a house in the Delhi-NCR region. He invested in a company called Manjushree Technopack when he was on the lookout for a bottle manufacturer for his food business. He stumbled upon Hawkins since the company’s cookers were used at home and he bought into Femcare when he saw his daughter use their cosmetic products.
As journalist Shankar Nath noted in a YouTube vlog last year, the Khannas’ preference for such B2C companies comes from the fact that he himself owned an FMCG business and has had a knack for finding good quality businesses in similar customer-oriented segments.
The Khannas know when to get out of a stock
What often defines a good investor is such people know when to exit an investment and cash out at the right time. The Khannas have done this several times including when they sold their holdings in the IT segment before the dot com bubble burst in 2000 and exiting Unitech before it went bust in the wake of the global financial crisis of 2008.
The Khannas have in fact parted ways with stocks that had a high allocation in their portfolios when they began underperforming. Examples include Rain Industries, Manappuram Finance and Gujarat Narmada Valley Fertilisers and Chemicals.
But they also have made some mistakes like exiting many of their positions in the wake of the lockdown of 2020 following the Covid pandemic.
Another important aspect of their investment process is that the Khannas use public data to make their decisions on big-ticket bets. Journalists like Nath say that the Khannas are reticent and rarely meet the managements of the companies they want to invest in or analysts tracking them. They also do not seem to conduct any scuttlebutt investigations or for that matter get into complex calculations. Although since they are so reticent, we can never be sure about this.
Rajiv Khanna does however track charting strategies like the 30-day moving averages to track stock prices and exits his positions if the stock goes below his 30 DMA. He uses this as a filter of sorts to predict a calamity as far as the stock goes, exit it, and re-enter the position when the event has passed.
This also means that he does not steadfastly hold on to the maxim of buy and hold for good.
So, should you clone Dolly Khanna’s investment style and gain HNI status?
The honest truth is we cannot recommend either way. While the strategy of backing mid and small caps and generating multibagger returns from them has worked for the Khannas and at least three dozen other well-known investors, do remember that this is a risky strategy and that returns can often be middling or even negative for long stretches of time, depending on how well the small and midcap universe is doing.
But what you can do is learn how they strategise and adapt similar techniques to suit your risk profile.
Here is what their investing style tells us:
- The Khannas focus on finding multibagger opportunities rather than just investing in index stocks or diversified mutual funds or index funds.Â
 - The Khannas find multibagger opportunities in the small and microcap space which is why their portfolio is focused on these counters
- They do however tend to diversify their portfolio across sectors and industriesÂ
- They invest using indepth research and fundamental analysis with an emphasis on growth and profitability
- They tend to target a sales growth of 15%, profit growth of 20% and an ROCE of 15% and buy companies with a high promoter shareholding of 50% or more. They also look at an interest coverage ratio which is comfortable at less than 4 and a price to sales ratio of less than 1.Â
- They also seem to regularly review and adjust their portfolio and improve upon their investment framework. Â Â
Should You Be A Copycat Investor?
Stories abound of investors who have amassed wealth through meticulous strategy, keen analysis, and extensive research. These financial wizards have unlocked the secrets to navigating the market’s complexities for remarkable success.
However, emulating their triumphs is no small feat for average investors—it demands extraordinary perseverance and an understanding that each path to success is distinct.
Investing is akin to traversing a labyrinth with its unforeseen challenges; it involves not just ambition but also enduring commitment and the insight that everyone’s journey is individual.
However, attempting to directly mirror the portfolios of these financial legends is a strategy filled with hidden risks.
The Risks of Imitating Investment Gurus
In today’s digital age, numerous online personalities openly share their investment choices on platforms like X (formerly known as Twitter), Instagram, and YouTube.
Television business news channels often feature ‘stockpickers’ who are revered by anchors and viewers alike.
However, attempting to replicate the trades of such ‘experts’ can lead to significant losses, especially when these role models shift from conservative strategies to more controversial positions.
What works for one investor might not yield the same results for another.
Financial freedom, though seemingly elusive, can be more attainable with an open-minded and persistent approach.
The Evolution from Harshad Mehta to Digital Investing
The investment landscape has undergone a dramatic transformation from the era of Harshad Mehta to today’s world dominated by online trading apps.
While Mehta’s shenanigans led to the advent of electronic trading in India, today’s landscape is significantly different.
In the past, investment tips and strategies were exchanged in informal settings like bars, trains, and social events.
Now, digital platforms have emerged as the new arenas for sharing financial information, altering the way we seek and follow investment advice.
Despite these changes, one principle remains constant: successful investing demands a personalized approach rather than mere imitation.
Balancing Risk and Reward in Asset Allocation
Many market-related websites feature stock screeners with labels like ‘Super Investors’ and ‘Guru’, focusing on stocks owned by prominent investors.
Cloning the portfolios of these successful investors might seem like a quick path to wealth, but this approach overlooks essential differences in financial goals, investment opportunities, and risk tolerance.
For example, large investors often have the advantage of investing substantial sums over extended periods, a luxury not shared by many retail investors.
Adopting Intelligent Investment Practices for Personal Finance
Embracing smart investment strategies requires a deep personal reflection on your financial goals and crafting a plan that aligns with your unique situation, rather than blindly following the successes of others.
It emphasises patience as crucial in navigating the market’s volatility and underscores the importance of diligent research across various assets to make informed decisions.
Effective risk management through diversification and disciplined investing, like rupee-cost averaging, is vital for mitigating losses and steadily building wealth over time.
Ultimately, adopting these tailored principles enables individuals to become wise managers of their finances, focusing on long-term achievements instead of short-lived trends or external influences.
The Importance of Diversification in Investment Strategies
You may find it profitable to emulate the portfolio of successful investors, but prudence lies in diversifying your portfolio.
Diversification involves spreading investments across various asset classes, such as stocks, bonds, real estate, and commodities to minimise risk and promote steady returns.
It works on the principle of balancing losses in one area with gains in another to ensure more consistent portfolio performance over time.
While renowned investors successfully employ this tactic by navigating different market conditions, retail investors face challenges like limited capital and lack of expertise required for managing diversified portfolios effectively.
Crafting a Unique Investment Strategy Inspired by Experts
Aspiring investors should take inspiration from the success stories of market experts but tailor their strategies to suit their risk profiles and financial goals.
This involves thoroughly understanding your financial situation, staying informed about market trends, and making investments based on this knowledge.
Becoming a savvy investor is not about blindly following others.
Learning from the best in the field of investing is valuable, but it’s crucial not to mimic their actions blindly.
Intelligent investing is not about emulating someone else’s strategy.
It’s all about picking up tricks from the big players, you know? Crafting your personal strategy for investing that fits just right with how much risk you can stomach. You’ve got to factor in your financial goals and time frame too.
You are not simply mimicking but building a game plan tailored to your needs.
Think of it as learning chess moves from grandmasters and then adapting them to your own risk comfort level.
Remember, it’s about understanding and embracing the rhythm of the market dance while staying true to yourself – recognising when to be bold and when it makes more sense just holding on tight!
Top Challenges for Financial Advisors
Financial advisors face myriad difficulties each day. To succeed, they must combine the skills of asset managers, financial planners, psychologists, and marketers. While most advisors can wear some of these hats well, managing several roles is very difficult, especially if switching from one role to another during a single advising session.
Stephanie McCullough, founder and a financial planner at Sofia Financial in Berwyn, Pennsylvania, said many challenges advisors face come from many misunderstanding their role in financial matters. “The general public is very confused, with good reason, about what we do and who we serve. They are not aware of the many different service models that exist,” she told Investopedia. “It’s still a common assumption that someone needs millions of dollars of investable assets to get the help of a financial advisor.”
Meanwhile, many advisors are working with far less help than in the past. “We used to have a whole back office that took days to enter trades and allocate them within client accounts. Now, one advisor does the job,” said Crystal McKeon, a certified financial planner and chief compliance officer at TSA Wealth Management in Houston, Texas.
Here are some of the biggest challenges financial advisors face in their efforts to grow their business and promote their brand to the public.
Managing Client Expectations
This is an area where advisors need to understand client psychology to succeed. While managing a client’s portfolio might be pretty straightforward, handling their expectations can be more complex. Many clients are unrealistic about investment returns and interest rates.
For starters, clients are often not financial professionals. They are unaware of global markets outside of the headlines they see, how investments work, how macroeconomic conditions may impact certain asset classes over others, why markets may be volatile, and how long investments may take to succeed. In addition, every client has biases, preferences, fears, and expectations. Clients may perceive what they think may happen based on what has happened before.
For example, Bitcoin might have increased more than tenfold from 2019 to 2021, but the asset class will continue to be volatile and may see similarly large declines.
It’s up to the financial advisor to guide them and educate their clients while providing investment advice.1
“For the most part, talking to clients about market volatility during actual times of market volatility is too little, too late,” David Flores Wilson, a certified financial planner at Sincerus Advisory in New York City, told Investopedia. “A better approach is to talk about likely future market volatility when they are first engaged as clients. During [periods of market volatility], we illustrate based on their risk tolerance what they could expect in terms of potential downside in the future.”
Advisors can also show their clients how value increases through investing. One way to do so is by helping clients maintain a long-term perspective in their investing so they don’t go off track with every movement in the market. Clients who can begin to see how their advisor keeps them on track will likely remain loyal to them.
“Educating clients by creating realistic expectations and planning for market drawdowns should be embedded in portfolio management,” said Neil R. Waxman, managing director of Capital Advisors in Shaker Heights, Ohio. “There is only one certainty: investment values will go up and investment values will go down.”
Staying in Touch
Advisors have more ways than ever to stay in close contact with their clients, but many don’t when things are going well. A constant flow of communication is necessary to maintain a solid relationship with most clients, regardless of what the markets are doing. Advisors can use Zoom and text messaging to keep in touch with tech-savvy clients. Once a market heads downward, being in touch is even more essential.
“During tough market times, it’s all about communication,” Alyson Claire Basso, managing principal of Hayden Wealth Management in Middleton, Massachusetts, told Investopedia. “It’s not just about whether they’re making money or not, but how well you’re keeping them in the loop.”
She said that research backs up her view that clients don’t necessarily leave advisors because of losses but because of a lack of communication.
“It’s crucial to stay in touch, be transparent, and manage expectations, especially when things get rocky. By being there for clients, listening to their concerns, and keeping them informed, we build trust and loyalty, even when the market is unpredictable.”
Negative news is never fun to share, but being transparent, empathetic, and supportive is a must.
Managing Information
Financial advisors always face an overwhelming flood of information. However, successful advisors understand that the key is not to react to every piece of news but to focus on client behavior and long-term strategies. Advisors must guide their clients toward reliable, time-tested sources of information to prevent misunderstandings and avoid decisions based on misinformation.
The breadth of information that advisors must manage is vast and includes the following:
- Clients. Advisors must stay attuned to changes in their clients’ lives, goals, and financial circumstances. This awareness allows them to continually adjust and develop road maps tailored to each client’s evolving aims and needs.
- Regulations. Staying informed about changing rules in the financial industry is critical. This knowledge is often essential for maintaining the licenses required to handle specific securities.
- Economic trends. While macroeconomic conditions are beyond an advisor’s control, understanding global economic circumstances is crucial as they significantly impact portfolio performance. Advisors need to anticipate how worldwide shifts might affect their clients’ investments.
- Political developments. Government actions (or inaction) can have broad financial implications for investors. Advisors must stay informed about legislation to position their clients favorably.
- Taxes. Changes in tax policies often directly affect investment strategies. Advisors need to be vigilant about shifts in capital gains tax rates, tax brackets, credits, and the treatment of various investment types, including alternative and foreign assets, as these can significantly alter a client’s portfolio trajectory.
By effectively managing this diverse range of information, advisors can provide their clients with more valuable, timely, and comprehensive guidance.
Emotional Engagement
Many financial advisors are very analytical. Professional certifications are often data-driven and require abundant skills in quantitative reasoning. However, many client decisions are based on emotion. Advisors need to be able to relate to their clients on an emotional level to maintain a working relationship.
“Money is an extremely emotional and personal topic,” said Valerie R. Leonard, CEO and financial advisor at EverThrive Financial Group in Birmingham, Alabama. “This adds to the emotional vulnerability that clients can feel when talking about their past or present relationships with money. If clients don’t believe they can trust you to be transparent or keep their conversations and financial details confidential, they will never do business with you. It’s really that simple.”
Your engagement with clients, of course, has many forms. For instance, suppose a client’s portfolio isn’t doing well. Your engagement likely includes considering the following:
- When to tell the client
- How often to check in with the client
- How to tell the client (i.e., do they prefer blunt language or a soft landing?)
- Where to tell them (i.e., is an electronic message most appropriate?)
- Preparing for how they will likely react
Financial advisors are bound by legal and ethical standards. As such, they must represent their clients to the best of their abilities and disclose any conflicts of interest.
Group Support
Independent financial advisors may often feel alone in their practices and have little in the way of planning support. Advisors who struggle with this can find support in organizations such as the Financial Planning Association (FPA), the National Association of Insurance and Financial Advisors, or the National Association of Personal Financial Advisors.
These groups have a wealth of resources in marketing, sales, and practice management to help make your professional life easier.
“When you’re joining a professional association, you’re looking for education, you’re looking for resources, you’re looking for peers to connect with,” said Peter Lazaroff, an Investopedia top-10 financial advisor, who noted he’s partial to the FPA, though he also belongs to other organizations.
How Do Financial Advisors Manage Client Expectations?
Managing expectations is a very socially driven, psychological issue that requires empathy, communication, and education. Clients often do not have the knowledge or expertise that their advisor has, and each client experiences different emotions about changes to their portfolio. Financial advisors must understand that their perspective is different from their clients, and bridging that gap is the responsibility of the advisor.
How Much Do Financial Advisors Make?
The median annual income nationwide for a personal financial advisor is $99,580 per year as of mid-2023, according to the last Bureau of Labor Statistics (BLS) estimate. The median hourly wage for professionals in the field at $47.88 per hour.2
Which Financial Advisor Professional Association Should I Join?
Each financial advising-related association has a focus. When deciding which to join, research them to ensure they have the kinds of services and networking opportunities you’re looking for.
Financial advisor Peter Lazaroff said that some associations offer free services to members that can be instrumental in your business. He mentioned that continuing education and even media training are crucial things some organizations offer that modern financial advisors can’t do without.
“Join a professional association that has continuing education, other resources to support your practice’s growth or your growth, and peer networking opportunities—those are what’s crucial to me,” he said.
The Bottom Line
It’s important for advisors to understand where their clients are coming from and make them understand the value that they offer. Those who can successfully manage their clients’ expectations can improve retention and their bottom lines. The pressure to stay ahead of technological advances, maintain a competitive edge in a crowded market, and meet the increasingly sophisticated demands of clients requires advisors to be not just financial experts, but also empathetic communicators and strategic business managers.
The most critical challenge, however, lies in building and maintaining trust with clients in an era of economic uncertainty and heightened scrutiny. Successful advisors will be those who can effectively balance the technical aspects of financial management with the human elements of relationship-building and clear communication. Joining a professional association can provide additional support.
Three Investment Lessons From 2024
We enter 2025 against an unusual macro backdrop. In 2024, time-tested recession indicators failed, inflation fell even as growth stayed above the historical trend and the Federal Reserve cut rates by 100 basis points even though financial conditions were already easy. Incoming data that didn’t fit with a business cycle led to outsized market responses and abrupt shifts in narratives. This heightened market volatility creates plentiful investment opportunities, we think. Take fixed income. Fed rate cut expectations went on a historic round trip last year. See the chart. The Fed itself pivoted from talk of an easing cycle a year ago to a mere recalibration now. By year end, markets had come around to our higher-for-longer rate view. We expected inflation to cool some – as it did. Yet we long believed that sticky inflation would prevent sharp Fed rate cuts and leaned against market pricing for most of the year.
2024’s round trip in rate cut pricing shows this is not a business cycle but a transformation – our first lesson. We see mega forces, or structural shifts, reshaping economies and markets. This transformation could keep shifting the long-term activity trend, making a wide range of outcomes possible. Last year, we focused on key stock drivers: strengthening corporate earnings and free cash flow growth. This led us to stick with companies delivering on earnings even when valuation concerns flared up. We stay risk-on as we think U.S. corporate strength is the scenario most likely to play out next year. Yet we eye signposts, including greater trade protectionism, to change our view if other scenarios appear more likely. Structural changes mean rethinking long-held investment principles – like the assumption growth will eventually revert to its historical trend.
Leaning against a cyclical view
We lean against markets interpreting data through a business cycle lens, our second lesson. Such an interpretation last year spurred recession fears and brief stock selloffs. That played out in December, too, with the sharpest stock slide in decades to follow a Fed cut during a bull market, our analysis shows. Our U.S. equity overweight isn’t shaken by the Fed’s signal of fewer rate cuts – we had expected that. Our overweight is grounded in the artificial intelligence (AI) theme, robust economic growth and broadening earnings growth. Soaring tech valuations and the concentration of returns in just a few tech companies caused some market jitters. Yet we see market concentration as a feature, not a flaw, of transformation.
Transformation can happen quickly. That is why our third lesson is to expect more volatility and surprises than usual as transformation widens the range of market outcomes in real time. A year ago, the word “hyperscalers†– or large tech firms investing billions in AI – had barely entered the public lexicon. Public policy is another area we expect to see swift change. We think policymaking could itself become a source of disruption and surprises – in an already more fragile world given heightened strategic competition between the U.S. and China. Trade protectionism is shaping up to be a key risk in 2025.
Our bottom line
We carry 2024’s lessons into 2025. We got clear evidence this is a transformation, not a business cycle. And we found it helps to lean against markets adopting a business cycle lens, eyeing more surprises as the transformation unfolds.
Market backdrop
U.S. stocks surged more than 20% over the course of 2024. Mega cap tech names led the way on the AI theme – even as stocks finished the year on a down note overall after the Fed signaled a slower pace of cuts ahead at its December meeting. Markets have brought up their year-end 2025 rate expectations to nearly 4%, in line with our higher-for-longer view. U.S. 10-year Treasury yields swung in a range of nearly 100 basis points during the year, closing out 2024 near 4.58%.
We get U.S. payrolls for December this week. Wage growth remains elevated due to an unexpected rise in immigration, in our view. While wage pressures have cooled some as immigration has slowed, they remain above the level that would allow inflation to fall to the Fed’s 2% target. Given the risk of resurging inflation from potential trade tariffs and the immigration slowdown continuing, market expectations of only two more Fed policy rate cuts in 2025 now seem reasonable, we think.
You have a 72% chance of making money in stocks in 2025
There’s a 73% probability the U.S. stock market will rise in 2025. These odds seem too good to be true, of course, since the market this year has already produced a well-above-average return — 28.2% as of Dec. 16, as measured by the Vanguard Total Stock Market ETF VTI+0.14%.
That’s triple the U.S. market’s average calendar-year return of 9.2% going back to 1794 (according to the database constructed by Edward McQuarrie, an emeritus professor at Santa Clara [Calif.] University).
Yet the market’s odds of rising in a given year are remarkably indifferent to what came before. Based on all calendar years in McQuarrie’s database, the market’s odds of rising in any given year are 73%. Following calendar years in which stocks rose, those odds are a statistically indistinguishable 72%.
What about five-calendar-year periods over which the market rose? Those odds would apply to 2025, since over the past five years the Vanguard Total Stock Market ETF has produced a 14.9% annualized return. The odds of the market rising in a calendar year following five-year gains are once again statistically similar — 72%.
What are the odds when coming off decade-long advances, such as the last one — over which the Vanguard ETF has produced a 13.4% annualized return. Following 10-year periods in which the market rose, the odds of the market rising in the subsequent calendar year are 73%. (These odds are plotted in the chart above.)
A gambling analogy helps illustrate what these statistics mean. Ask yourself: What odds would you place on a coin flip coming up heads if it had come up heads in each of the five previous flips? Or if the previous five flips had each come up tails? Many of us give different answers to these two hypotheticals, as if the odds that apply to the sixth flip have anything to do with what came before. They do not, of course, since the coin has no memory: The odds of that sixth flip coming up heads are always 50%. To think otherwise is to be guilty of what is known as the gambler’s fallacy.
It makes theoretical sense that the same is true of the stock market. If the odds of the market rising in a given calendar year were actually correlated with what had come before, then shrewd traders wouldn’t wait until January of that next year to exploit that correlation. They would instead place their bets in the preceding November or December, with the consequence that the gain or loss that otherwise would occur in that year would be transferred to those prior months. The net effect would be the correlation’s disappearance.
You may have other reasons to expect equities to do particularly well or poorly in 2025, of course. The stock market is extremely overvalued, for example, according to almost any valuation measure with a decent long-term record. But valuation only exerts its gravitational pull on the market over long periods of time, such as a decade. Over shorter periods, including calendar years, valuation indicators have relatively little predictive ability.
The bottom line? Based only on how the stock market performed this year, the odds of the stock market rising in 2025 are no higher or lower than they would be if equities were currently sitting on a big year-to-date loss.
Stock Picking Success: Batting Average Or Slugging Percentage?
The passing of Pete Rose this year brought to mind the discussion of batting average versus slugging percentage for stock selection and portfolio management. Pete Rose had a lifetime batting average of .303 with 4,256 hits in his 24-year baseball career. This means he got a hit almost once in every three at-bats, which is an outstanding result but doesn’t get him into the top ten all-time for Major League Baseball. According to MLB, Josh Gibson holds the record for the highest career batting average at .372.
On the other hand, Babe Ruth has the all-time highest slugging percentage at .6897, with a batting average of .342. The slugging percentage measures the total number of bases a player gets per at-bat, so it considers the player’s power rather than counting all hits the same as with the batting average. Interestingly, Babe Ruth also failed a lot, striking out 14.4% of the time he was at the plate. Pete Rose, by contrast, had a very low strikeout percentage of 8.1%.
So, what does all this have to do with picking stocks and managing stock portfolios?
Despite having a Babe Ruth-like slugging percentage, the U.S. stock market has a high strikeout average. According to a fascinating paper by Hendrik Bessembinder recently examining the returns on 29,078 U.S. stocks from 1926 through 2023, over half of all stocks, 51.6% to be precise, had negative cumulative returns. How does the stock market have long-term nominal and after-inflation returns higher than any other asset class while more than half of the stocks fall in value while publicly traded?
PROMOTED
The complex mathematical answer is that stock returns have strong positive skewness. However, a simple example of long-term positive compound returns provides an easier-to-digest answer. Take a portfolio of just two stocks selling for $100 per share. The first stock grows at 9.8% annualized, while the second stock falls by 9.8% annualized over thirty years. One would think our total portfolio would stagnate during that period since the losses in one stock would offset the other, but compound returns make our intuition incorrect. The exponential return on our positively performing company outweighs the loser. This portfolio grew to be worth $1,657, a 7.3% annualized rate. In other words, the highest-performing stocks more than compensate for the losers over time.
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Pick your player: Pete Rose or Babe Ruth?
All other things being equal, you would pick Babe Ruth for your team since his power more than made up in production for the strikeout. Frankly, you would want both on your team if you could. But should investors seek a high batting average or swing for the fences? In his book More Than You Know, Michael Mauboussin provides a robust rationale that one should also strive to be the Babe Ruth of investors.The video player is currently playing an ad.
He notes that “the frequency of correctness does not matter; it is the magnitude of the correctness that matters.†The dollar change in a portfolio counts as success in investing, not the percentage of stocks with a positive outcome. Much like the stock market as a whole, a successful investment portfolio typically has exceptional stocks that more than overcome the subpar returns of the duds.
Crucial Implications For Investors
Mauboussin notes that investors must consider probabilities when investing in a stock since we know that significant losses and winners in a few stocks are the likely drivers of success versus failure in investment excellence. He quotes the late, great Charlie Munger speaking about the thought process of Berkshire Hathaway’s (BRK/A, BRK/B) Warren Buffett, “Take the probability of the loss times the amount of possible loss from the probability of gain times the amount of possible gain. That is what we are trying to do. It’s imperfect, but that’s what it is all about.â€
Trying to hit home runs does not mean buying the riskiest stocks. Contrary to academic teaching on the subject, riskier stocks, as defined by higher volatility, do not provide investors with higher returns. Furthermore, a few lethal losses can destroy the performance of a portfolio. While Buffett began his investing career buying “cigar butts,†low-quality but cheap companies with one more “puff†left in them, he evolved to focus on higher-quality companies with Munger’s influence. Buffett now says that “it’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.â€
According to Howard Marks, Warren Buffett, the greatest investor of all time, is credited with just twelve sensational winners in his career. Charlie Munger told Marks that the “vast majority of his own wealth came not from twelve winners, but only four.†The key was to find and hold onto those winners while avoiding significant losses. Alas, in the words of Warren Buffett, “investing is simple, but not easy.â€
Don’t Invest Alone. Get a Investment Mentor
After talking to hundred of investors I’ve learned that the majority go into the experience with the feeling that they’re doing this for themselves, and so they’re on their own. They seek the education and the hand-holding they need to do it themselves. Which is fine if that’s what they want to do. But I’ve found that investing is much easier and much more enjoyable when you do it with someone else. Peers and mentors have helped me to gain more from my investments, and I’ve also made lasting friendships with people I’ll know and love for the rest of my life. Now I don’t mean going into joint investments with these people, but talking about the routes you’re taking and the things you invest in, sharing tips and pointers, and going on that journey together. An investment mentor can do a lot for you.
Looking at having peers and mentors that are doing more than you, are putting more value than you are contributing, that is a powerful person to have in your life. If you don’t have that person and there is not this drive to meet that level or get to that next point of resistance then I would say that’s one place to start. Now, it doesn’t have to be someone you hang out with all the time, it doesn’t have to be someone you have a relationship with. We live in a world where you can get on a podcast and you can listen and find personas or find people that are doing amazing things and use them as your mentor and use some of the things they’re doing as your goal and that’s what’s going to kind of push you along and hit really that other need that we have.
Now, I think the idea of these needs, they’re different for people and sometimes are even different based on the circumstance you’re in in your life. Looking again at this growth side of things, it’s just one of those principles that’s going to continue to push you and you can either deny it or you can accept it. Accepting that principle is incredibly empowering because I think if you accept it, now there’s some accountability associated with it. You know that you have to be growing and whether it’s through books or courses or personal development seminars or whatever, you’re gonna try to get yourself driven, get yourself motivated and pushed to that next level.
So let’s maybe go through a few other needs. And there have been studies on this Abraham Maslow is big into it, Tony Robbins is huge into this. We have a lot of these kind of gurus that are out there that have really kind of discovered some various similar principles and they’ve organized them in different ways. There’s really two ways to do it. You can just live life and experience things and try to figure it out on the fly or you can learn from people that have discovered them already.
Q: Why is it important to have an investment mentor in your financial journey?
A: Having an investment mentor is crucial because it provides guidance, knowledge, and expertise that can help individuals make informed investment decisions, avoid common pitfalls, and achieve their financial goals more effectively.
Q: How can individuals find a suitable investment mentor?
A: Finding a suitable mentor involves networking, seeking recommendations from trusted sources, and researching potential mentors. It’s essential to identify someone with relevant experience and a willingness to share their insights.
Q: What are some of the valuable benefits that individuals can gain from having an investment mentor?
A: Benefits of having a mentor include gaining access to industry knowledge, learning from real-world experiences, receiving personalized advice, and building confidence in one’s investment decisions.
Boss level: The gaming ecosystem powers up
Over the past 50 years, gaming has evolved from simple experiences like Pong into sophisticated virtual worlds where over 3 billion video game consumers engage today. Leveraging advanced graphics, artificial intelligence and seamless online connectivity, modern games offer rich, dynamic experiences considered science fiction just a few decades ago. Casual gaming has surged, making gaming a daily pastime for many, even those who don’t see themselves as traditional gamers. As gaming becomes increasingly ubiquitous and accessible via mobile and other digital devices, the landscape is ripe with opportunity for founders and investors.
Gaming is omnipresent
No longer are video games confined to a single platform or medium—they are everywhere. From blockbuster movies and TV shows inspired by iconic game franchises to gaming streamers who have turned social media platforms into bustling hubs of gaming culture, gaming has never been more accessible. According to the Entertainment Software Association, in 2023, 78% of U.S. households reported playing a video game on a mobile device in the past 12 months, up from 33% in 2012.1 This widespread accessibility has led to a significant portion of the U.S. population engaging in the activity regularly, with 61% of Americans reporting they play video games at least one hour every week. A growing population of gamers creates a greater need for new content and game genres, presenting an exciting opportunity for gaming startup founders.
More gamers, more innovation (and competition)
Unlike traditional tech startups that focus on scaling software solutions, gaming companies typically focus on creating compelling intellectual property (IP) to capture and retain a player base. This IP-led approach distinguishes the gaming industry from others, where the primary value is derived from the unique content and experiences provided. However, creating compelling IP is easier said than done. The proliferation of gamers has led to a significant increase in the number of titles being released and a surge in new developers entering the market.
Indeed, expanded consumer interest provides opportunities for early-stage developers to create innovative IP as more niche markets and genres become viable. However, the sheer volume of content releases across major platforms also intensifies competitive pressure. In this case, founders may pursue venture capital to bolster resources and access industry expertise.
The gaming startup ecosystem is maturing
Roughly half of active venture-backed gaming startups today are focusing on content creation, reflecting a high demand for new IP. However, over the past decade, there has also been a notable increase in startups specializing in two areas:
- Development: Game engines, development tools and technology services
- Experiences: Streaming services, coaching and training, social and community, marketplace and rewards
As the industry evolves, there is an increasing need for advanced tools and services that support and enhance content creation. Moreover, startups in development and experiences play a key role in making gaming even more accessible by enhancing aspects of modern gaming such as livestreaming and sharing content with friends, ultimately facilitating wider gaming consumption and fostering a more inclusive gaming environment.
Where venture capital investors are putting money to work
Venture capital funding plays a vital role in the gaming industry, helping accelerate time to market and allowing developers to capitalize on emerging trends. VC investments into gaming startups have risen drastically from a decade ago; the amount of capital invested in gaming has increased 3.7 times from 2014 to 2024 YTD, surpassing the growth rate of the broader venture capital market, which has expanded by approximately 1.5 times over the same period.
In 2021, total U.S. venture funding into gaming startups peaked at $11.2 billion. Like virtually every other industry, venture activity has fallen sharply since 2021, however 2024 is showing some bright spots. $3.7 billion of capital has been invested into gaming startups through August 2024, which is nearly double the sum invested over all of last year. Assuming VC investment in gaming companies continues at a similar rate through the end of the year, 2024 could end with roughly $5.5 billion in total investments—the third-highest year on record.
The majority of VC funding goes into gaming startups focusing on content development. Year to date, roughly 65% of the approximately $5 billion of venture capital invested in the gaming sector globally has gone to content-focused startups.
This trend clearly underscores investors’ ongoing belief in the power of IP to drive growth in the gaming industry, and it highlights the enduring value placed on developing compelling titles that can capture and sustain the attention of a broad (and broadening) gaming audience.
Conversely, valuation data reveals a nuanced picture. While content-focused startups continue to garner the largest share of capital flows into the gaming sector, startups focused on development and experiences command the highest valuation premiums. These areas of the gaming ecosystem are key to unlocking and enabling broader industry growth, given their potential to scale and ability to support a wide range of content creators.
For founders, while there is substantial opportunity in content creation, investor behavior suggests there is significant value in building the infrastructure and platforms that support content and enhance player experiences. This is evident in the rise of partnerships between gaming studios and infrastructure providers such as AWS, Google Cloud and others. These providers enable developers to scale globally, reduce latency and focus on creating content without the burden of managing servers or complex backend systems. Startups that can deliver solutions by leveraging gaming infrastructure (or creating it in-house) may be well-positioned to attract venture capital at a premium valuation and potentially benefit from a more stable and scalable business model compared with content-focused peers, which may face higher risks associated with the unpredictability of content success.
Will artificial intelligence define tomorrow’s gaming landscape?
Recent advancement in AI will play a transformative role in game development, offering both immediate enhancements and longer-term shifts in how the industry operates. From streamlining creative processes to building entirely new gaming experiences, AI is rapidly becoming a core tool for developers. According to a survey conducted by Bain & Company, video game industry executives believe generative AI could manage more than half of game development within 5 to 10 years, up from less than 5% today.
The ability to rapidly develop and iterate games keeps them relevant in an industry where player preferences can shift overnight. With the rise of cloud-based development tools, remote and distributed teams can collaborate more efficiently and effectively, reducing the overhead costs typically associated with game development. These innovations provide an opportunity for startups with limited resources to compete with larger studios, develop more IP and infrastructure, and capitalize on emerging trends.
Key considerations for game development startups
In the evolving landscape of game development, startups must navigate a complex array of challenges and opportunities to succeed. Here are some priorities to consider:
- Build a deep bench of creative directors:Creative directors are essential for developing compelling gaming experiences. A diverse and deep talent pool is critical for creating the narratives that will set a company’s IP apart from its competitors.
- Pursue impactful ideas:Tomorrow’s successful gaming startups will focus on ideas that offer meaningful value beyond just gameplay. This commitment to creating experiences that resonate on a deeper level can enhance user engagement and loyalty  and contribute to long-term success.
- Focus on efficient operations:This will be necessary to allow fast, iterative game development, reducing time to market.
- Access AI expertise: AI will be crucial for gaming startups to keep pace with the industry.
- Develop evangelists and advocates:An active and engaged community can promote releases and provide critical feedback, especially to newer gaming startups.