18 Jun Your financial planner as your investment coach Part 5
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Providing support and guidance
In a relative sense, building and maintaining a portfolio is, with the necessary skills available, the logical, straightforward part of investing. The harder part is having the confidence and emotional fortitude to stick with the programme through thick and thin.
A good financial planner will take every client through a disciplined risk assessment process which considers both the emotional and financial consequences of the trade-off between hoped for returns and possible losses. They will also take time to explain the role each of the assets plays in the portfolio.
Even so, when markets, particularly stocks or equities, are either going up or down with great magnitude, as they inevitably do from time to time, an investor’s emotions will kick in either in the form of greed or fear.
Figure 1: Greed and fear – humans are poorly wired to be good investors
Source: Albion Strategic Consulting, adapted from Tim Hale (2023), Smarter Investing: Simpler Decisions for Better Results. FT Publishing. © All rights reserved.
As human beings, we simply can’t help it. Given that investors feel the pain of losses twice as much as the pleasure of gains[1], we are most vulnerable at times of market falls. A good planner needs to act as an emotional counter-weight at these times and reinforce in our minds (engaging the logical side of their brain) that the portfolio is structured as it is for a specific reason and knee-jerk reactions should be avoided at all costs.
Empirical insights demonstrate differences exist between returns that funds achieve, and the returns achieved by the investors in the fund. Whilst to some this may seem a confusing statement, the issue is due to the timing of investor cash flows into and out of the fund.
Figure 2: The behaviour gap
Source: Albion Strategic Consulting
It appears that fund investors are not good at market timing, resulting in achieving lower returns than the funds they invest in. This wealth destroying phenomenon has been coined ‘the behaviour gap’ by the industry and is widely observed across a range of fund sectors. Patience and discipline are surprisingly rare.
This behaviour gap is often somewhere in the region of 1% to 2% a year. Given the fee that most planners charge as an ongoing fee, which should also include comprehensive financial planning and regular goal tracking, it is easy to see the value of employing a steady hand to guide us through choppy waters.
With investing, your capital is at risk. Opinions constitute our judgement as of this date and are subject to change without warning.
Important notice: This marketing communication is for information purposes only. Unless indicated, all views expressed in this document are those of the author(s). The information in this document does not constitute advice or a recommendation and you should not make any investment decisions on the basis of it.
[1] Coined ‘prospect theory’, Kahneman, D., Tversky, A. (1979). ‘Prospect Theory: An Analysis of Decision under Risk’