Although there are many people who argue there is no value in financial advice I continue to argue that there is a great deal to be found but this value needs to be seen and communicated effectively. Of course, there will always be individuals who can and will do it themselves and that is okay.
In this blog I want to focus again on the power of emotions. There is no doubt we are in a very different environment to that in which we found ourselves say ten or twenty years ago; life expectancy is greater, gold plated pensions are for the few, and in reality cash and bonds are not what they once were. In fact cash only delivers negative real returns.
If we agree with the argument on cash, and possibly bonds, then the only way to make money and deliver income is through investing in equities. However, investors are fickle – when the market is doing badly they don’t want to invest and when it is riding high they want to pile in (which is the worst time usually).
The markets are currently riding high, and we are starting to see headlines about the great rotation from bonds to equities so what does this mean for the future?
If we focus on one market; the S&P 500 index over the last sixty years significantly outperformed during periods of recovery compared to periods of recession. There were two periods where the market was extremely volatile and delivered no returns if you were invested during that time. These periods were 1969 to 1982, and between 2000 and 2013.
During the seventies and early eighties inflation and interest rates were very high and commodities did well while stocks languished. Although from 2000 and 2013 inflation and interest rates were not the problem commodities outperformed equities since the popping of the internet bubble.
In the eighties falling tax and interest rates played a part in the boom and likewise falling energy costs in the US could do the same over the next 20 years.
The difficultly is that there is a generation who only know the markets from 2000 and they don’t believe in equities and have given up any notion of investing in them. To some extent this fuelled the rise in buy to let properties as an alternative asset class. The problem is that now the cost of these properties is out of the reach of many and therefore corresponding yields are lower.
Going forward we face a low interest rate environment for some time to come. This means that cash will be going one way especially when there is less concern around inflation. And although developed market bonds have had a good run, there is general agreement that this will not continue. So if we accept this argument the only long term investment opportunity is equities.
This brings us back to staying in the game. It is important to focus on relative performance against the benchmark but value is actually keeping you in the game.
There are three key factors:
- Clearly investing in one market for any one period of time restricts the investment opportunities and therefore diversification across sectors and regions is crucial.
- Patience is another crucial factor – investing is not about short term bets, there are a few good gamblers but there are a higher proportion of bad gamblers. Investing is about having realistic timeframes and being patient.
- The final factor is research. When constructing a portfolio it is about knowing who is investing your money and how they do it. There will be times when they underperform but if you view your portfolio as a team it is the team that wins over the long term, and not individual players.
In conclusion my argument is that one of the greatest values to be gained from your financial planner is that they keep you in the game, and they do this by keeping a close eye on the team. Don’t underestimate the value of this when considering whether to do it yourself or pay for the advice. Advisers can act dispassionately towards certain investments / funds which may be a key component to success!
Please note: Any reference to a share or fund is not a recommendation to sell or buy that share or fund. You should carry out your research before making any decision. You should also note that past performance is no guide to future performance and investments can fall as well as rise.
Source: Guru Focus