The Irrationality of Humans, Investors, and…Watch-Buyers?


My husband recently nearly talked me into purchasing his definition of “a decent” wristwatch — and it was a reminder of how we, as humans, are completely irrational.

My thinking on watches is simple: What’s wrong with the classic, battery-powered quartz watch I’ve had for years? It has fewer parts, I don’t have to send it off to one of the handful of experts who specialize in servicing my specific kind of watch every time it needs a repair, and it’s more accurate at keeping time (isn’t this the stated objective of a watch, after all?). Win-win-win in my book.

watch-bg01If the less complicated nature of a quartz watch isn’t good enough, they’re also less expensive than the self-winding or automatic watches my husband is always showing me on Hodinkee or Watchonista.

But, automatic watches are so cool — so the counterargument goes — gears, calibers, and craftsmanship, oh my!

Yet, if the whole purpose of a wristwatch is to tell me the time, and if quartz keeps better time at a lower cost, then are automatic watches the definition of a Veblen good (a product for which demand rises as the price increases)?


Veblen Goods in Financial Services?

This question leads me to another: How many Veblen-good-esque products are in circulation today in the financial services industry?

Our industry has plenty of investment offerings wrapped in a cloak of opacity that benefits the asset manager, not the investor. Reforms like the 1940 Act and Dodd-Frank pulled the rug out from under some egregious offenders, but let’s face it, there are still plenty of products marketed as being crème de la crème financial instruments, something complex for the everyday-yet-also-elite investor.

Many of these products do not efficiently or consistently achieve their stated objectives — due to poor investment decisions, being strangled by management or “other” fees, or both.

Layered on top is the fact that the market environment in 2020 has thus far provided a unique set of facts for many investments (the complex ones, the vanilla ones, and everything in between).

Risk assets year-to-date have experienced significant volatility and large drawdowns. Generally speaking, this represents a market environment where more expensive, alternative-type strategies should outperform. On the other hand, the context for these market moves has been one that is largely unprecedented in market history, notwithstanding the record-breaking recovery back to new all-time highs. All indications thus far do not support that more expensive “shiny objects” resulted in better investment outcomes.

 

Conspicuous Consumption is Not in the Best Interest of Your Clients

So why do advisors tolerate these outcomes when recommending expensive and/or complex investment options to their clients? Is it because the bells and whistles are more important than the stated objective of providing risk-managed returns, outperforming a benchmark, or protecting capital? One would hope not.

As I would argue is also the case with wristwatches: Advisors should choose the products that are best suited to achieve the client’s objectives, because conspicuous consumption is not in the best interest of the client.

At Blueprint, we consider our investment methodology to be analogous to an attractive and staple quartz watch. I’d call us the Citizen Eco-Drive of asset managers. We may not have a porcelain dial that’s hand-painted in Japan or sparkle with gemstones placed using precision tweezers, but even an automatic watch enthusiast like my husband would admit we’re an excellent option to consider for everyday wear. We get the job done, we make you look good, and you feel good about our story.

Because we have a systematic investment process that utilizes liquid, non-esoteric holdings in our models, our solutions are easier to explain due to their rules-based and cost-effective characteristics.

This matters more than ever in a COVID world because investors’ stress levels are justifiably high, even if the S&P 500 has pared its losses from March. We know very well from our advisor clients that, even if investors are trying to play it cool, they are on high alert these days. It is therefore imperative for advisors to be able to simply explain a product or strategy. Opacity is not your friend.

As an advisor, you owe it to your clients to be able to recommend a solution that has clear objectives and the ability to achieve them efficiently and consistently.

 


 

Blueprint Investment Partners is an investment adviser registered under the Investment Advisers Act of 1940. Registration as an investment adviser does not imply any level of skill or training. The oral and written communications of an adviser provide you with information about which you determine to hire or retain an adviser. For more information please visit adviserinfo.sec.gov and search for our firm name.

Blueprint Investment Partners is an investment adviser registered under the Investment Advisers Act of 1940. Registration as an investment adviser does not imply any level of skill or training. The oral and written communications of an adviser provide you with information about which you determine to hire or retain an adviser. For more information please visit adviserinfo.sec.gov and search for our firm name.

Past performance is not indicative of future results. The material above has been provided for informational purposes only and is not intended as legal or investment advice or a recommendation of any particular security or strategy. The investment strategy and themes discussed herein may be unsuitable for investors depending on their specific investment objectives and financial situation.

Information obtained from third-party sources is believed to be reliable though its accuracy is not guaranteed.

Information contained on third party websites that Blueprint may link to are not reviewed in their entirety for accuracy and Blueprint assumes no liability for the information contained on these websites.

No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission from Blueprint.

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