After last week's incredibly deranged market moves it's nice to see the market trending upwards again.  The inability of experts to simply predict if the market as a whole is headed up or down is a signal of volatility and instability.

It's surprising to watch this given that the globalization of the markets, currencies and economies should attempt to stabilize the global markets as a whole, but instead it's allowed each major blow to have deep ripple effects throughout other nations.  Still, it's nonetheless good to see cash being pulled out of treasury bills and dumped into riskier equity stocks just days after Wall Street showed it's not out of rehab yet.

Here's what I think.  When the market dips the headlines all read something along the lines of "blah blah fears of Greece and EU recession combined with Volcanic Ash and crack in my coffee", when they recover the next day the sentiment is that investors are 'encouraged' by results and government recovery efforts.  In truth, the market is moved by daily direction sentiment and big player gambles.  If you're going to be selling shares in Apple Inc. because you think the market is going to dip tomorrow you've probably misunderstood what it means to be an investor.  Stick to diversified portfolios / ETFs, penny stocks for selling the market on a whim, and hold onto companies of value.  If Apple was good today it will be good tomorrow and it will be good the next day.  Look for news from Apple (or it's competitors), it's trends and industry trends, and it's own financials before deciding to make a change.  Apple doesn't make better or worse ipads because a volcano went off, and your college kid doesn't want one any less.

What makes a good real estate agent?  Knowledge of real estate? Negotiating ability? A strong work ethic?  Perhaps all of these play a role, but to employers the measure of skill of a real estate agent is the one that pulls in the most money.  Period.  The one that can turn over the fastest, highest priced houses in the shortest period of time, regardless of whether their clients are getting a good deal. 

In the Investment Advisory world, there is a similar standard.  Financial advisors that garner clients with significant net worths, and thus pull in big bucks to their firms are praised and rewarded with vacations, incentive bonuses, personal assistants and other perks.  It doesn't matter if the guy in the office beside him has been continually picking the right stocks if he can't get others to actually give him their money.  This creates an interesting dilemma for financial advisors - do they spend time choosing the right stocks for their clients, or spend time nurturing their relationship with their clients?  Given their bonuses are based on what they charge the client, not their clients net gains, it's natural to see why they don't favor studying technical analysis charts all day.

This means when you are choosing a financial advisor, you have no reference of past performance to determine if they are good - so much like in real estate, you're foced to go by recommendations and perceived competence, rather than anything measurable.

But what if we could measure success?  What would it look like.  Portfolio managers base their success on the risk adjusted return of their portfolios; a lengthly process to calculate, and one certainly not performed for every financial advisor out there.  But tools do exists (in fact, we have portfolio risk calculating tools right here on the site), so why aren't they used more often? 

Good question.  I believe if more companies switch to investor performance metrics for bonus pay it would better align Advisor and Client goals together.  It would also make clients happier to pay for 'premium' advisor, and not just the guy that takes you out drinking.