Once you remove yourself from Wall Street’s complete and total obsession with trying to beat the stock market average, and accept the fact that equaling the stock market average is a sophisticated approach to the whole thing, building a successful portfolio becomes an immensely gratifying experience. (The Coffeehouse Credo)

The Coffeehouse Investor has long advocated the simple concept of indexing — owning all the securities that make up a particular index, or asset class. This philosophy is based on the premise that, because there are millions of investors casting their votes each day on security valuations, the market processes all available information in a relatively efficient manner.

This isn’t to say that market valuations can’t be highly irrational at times, because they can, and that there aren’t inefficiencies in the market, because there might be. The Coffeehouse Credo suggests instead, and Wall Street has proven as much, that any attempt to consistently exploit market inefficiencies over time is likely to be met with disastrous results.

The stock market is risky enough as it is. There is no sense in laying another level of risk on top of market risk in an effort to secure your future financial goals.

By now there are probably a few investors who are asking themselves, ``How does this Coffeehouse Credo square with my stockbroker who spends all day tuned in to CNBC, calling me with the latest quotes and revised earnings estimates of his favorite stocks?’’

Is it possible for you to be a successful long-term investor when your stockbroker is managing your portfolio from a short-term perspective? To put it bluntly, is your stockbroker helping or hindering you from reaching your financial goals? How can you tell the difference between a stockbroker who is in hot pursuit of the next sale, and an excellent financial advisor who plays an integral role in helping you achieve your long-term financial goals?
Here are a few clues...

A stockbroker is a master at building a hodgepodge portfolio consisting of 18 different stocks and mutual funds. He will call you periodically and encourage you to sell a little of this and buy a little of that in order to “fine-tune’’ your portfolio. It is a seat-of-the-pants approach to investing in which both of you made lots of money during the 1995-1999 stock market run, but is causing you to reconsider now that your portfolio has declined 25 percent or more.

An excellent financial advisor will work with you to create an Investment Policy Statement that spells out your asset allocation goals in relation to your investment time horizon and your need to take risk in reaching these goals.

One of the primary benefits of an Investment Policy Statement is that it forces you to put into writing a long-term, detailed investment strategy that includes periodic rebalancing of various asset classes. This has the dual benefit of incorporating a “buy low-sell high’’ philosophy of investing while maintaining your predetermined asset balance.

A stockbroker will allow, even encourage you to do just the opposite — sell your under-performing funds and buy the top-performing mutual funds. It is the path of least resistance in dealing with clients, because it taps into our pursuit of performance and a desire to own mutual funds with five-star track records. It is the ultimate in “buy high-sell low’’ investing.

A brief review of the market’s performance and investor behavior this past year reveals how this has played out. At the top of the NASDAQ market one year ago, money was pouring into growth-at-any-price mutual funds. Now, a year later, these same dollars are flowing out of these funds, at significantly reduced prices, as investors search out the next hot sector.

The excellent financial advisor will work with you to build a diversified portfolio that captures the entire return of many different baskets, or asset classes. This means looking at choices within your tax-deferred account and then combining these investments with tax-managed funds in your taxable account so that your entire portfolio grows in a tax efficient manner.

A stockbroker will provide you with a monthly statement that shows account positions and the dollar value of gains or losses generated in your portfolio
This is not enough.

The excellent financial advisor will provide you with a quarterly and annual summary that shows a detailed performance record of each asset class that includes a summary of your entire portfolio. This report will include changes in absolute and percentage values, numbers that are critical in determining performance compared to a benchmark, and, for retired investors, is instrumental in monitoring sensible withdrawal rates.

Many investors have experienced success and satisfaction in building and maintaining portfolios on their own. The market activity of this past year has reminded all of us that successful investing consists of more than simply owning the fastest growing companies or an S&P 500 index fund. If you choose to work with a financial advisor, make sure they understand this also.

(Editor’s Note: Bill Schultheis is nationally known as a stock market analyst. His Coffeehouse Investor column appears in numerous publications throughout the country. He may be reached at william@seanet.com.).