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Brett Investment Newsletter - August 2011
Boring is Good
The thing about investing when done properly is it’s far from sexy and is in fact quite dull and boring.
I wish more IFAs were boring ………..
You see boring is good when delivering sound financial and investment advice. Recently we have relished our boring approach to investment advice. By keeping things simple and sticking to the key rules of investing (keeping costs low, good diversification and staying disciplined) we have been able to avoid the exciting funds which have failed so spectacularly.
If only more IFAs had stuck to this approach rather than push the next new thing.
Whilst I hope that the service we offer, linking your financial decisions to the lifestyle you really want, is never dull the best financial solutions usually are. Paying off inappropriate debt, keeping a cash reserve, rebalancing your portfolio from time to time and above all staying disciplined are often the best course of action.
But when I read stories of inappropriate investment advice I always ask ‘why’?
Why would any IFA recommend a complex and esoteric product (I am talking about so called guaranteed products) unless it is because they get paid more (commission) for this and / or they wish to impress their clients.
Leaving aside the issue of commission (as this is set to be banned from 2103) the need to impress is perhaps more worrying. I accept that interest rates are low and investment markets can be wildly volatile but the case for investing properly is as strong as ever. Despite decades of evidence to the contrary, there are always those that feel it possible to break the unbreakable link between risk and reward.
So rather than simple, evidence based investment recommendations, some advisers will always recommend what we (and the majority of IFAs) would never dream of touching.
The problem is that when things go wrong and compensation is due it is often those that are left who have to pick up the pieces (and the costs).
Perhaps with the introduction of the new RDR rules in 2013 things will improve. I can only hope so.
When Market Is in Turmoil, Fight the Urge to React
When global stock markets hit a rough patch, like we’ve been seeing, there’s a natural tendency to do something and to do it fast. It is a basic human instinct and one that we all to a greater or lesser extent have.
Plenty anecdotal evidence exists confirming that an investor’s natural reaction is to sell after bad news (when the market is already down) and buy when news is good (after the market is already up). In other words, sell low and buy high.
The first thing to do is acknowledge that we need to fight this tendency to do the wrong thing at the wrong time, so here are a few things to keep in mind:
1. Remember the “why.” Almost every time you make a rash decision based on past market performance, it’s a mistake. Investment decisions should be made based on your goals and not the market. Make changes when your goals change, and ignore the market.
2. Incorporate new information slowly. Of course, you learn things during market corrections, and what you learn may change your goals. During the huge decline of the credit crunch in 2008-9, many of us learned what risk really meant. Before that, risk was an abstract concept, but it became very real then. That experience might have changed your goals. That would be a reason to make a change to your investments. But even then, be patient. The time to think about going for a swim is not when you’re already in a life raft. Wait until things settle down and you can think rationally about the next course of action.
3. “Have you seen what the market is doing?” This is often what people say when they are in a state of shock and ready to go to cash “until things clear up.” Notice the implication that the market is “doing” something. The reality is that all we know is what the market has already done. We have no real idea of what it will be doing tomorrow or next week.
4. Jumping out of the frying pan and into the fire. Going to cash until things clear up does not reduce stress. When you sell, because you feel the market is going to fall further, you have a new problem: when to get back in. Unless you decided that your new plan does not involve exposure to the stock market, you now have to decide when to re-enter the market. The most common “plan” is to buy back in when things have “cleared up,” whatever that means. If that’s your plan, stop and take the time to define what the world will look like when things have cleared up.
Will the news be better or worse than today? Will the economy look better or worse? What will the BBC’s Robert Peston be saying?
Now think about this for a second, do you think the market will be higher or lower when things have cleared up? Of course, the market will be higher when things clear up. So now what we’re talking about is a plan to sell low (now!) and buy high (later!) on purpose.
5. Good diversification is crucial. By having a broad mix of very low risk assets (green) and high risk assets (orange) it gives a good chance that when your shares fall, your lower risk assets strengthen offering valuable protection.
6. If you have a plan, stick with it. You would never plant a tree and then dig it up every time the wind blows to see how the roots are doing.
7. Don’t worry in silence. If you are at all anxious we are only a phone call away.
Lastly, none of what I’ve outlined is easy. It’s hard to stick to a plan when everything is screaming at you to abandon ship. I’m also not saying that the market will stop going down. But if you have carefully considered your investment decisions in the context of your life and goals, with a clear understanding of the risks you take when you invest in the stock market (no excuses here since we just lived through the best example of risk in decades), then now is the time to stick to the plan.
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