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Do you really need a financial advisor?

For those who battle to remain sane during trying times, contracting a suitably qualified financial planner may be preferred.

This is a topic that I expect will attract many comments. At the outset, I want to state that this article is not meant to convince you that you do need a financial advisor. My intention is to share with you some common trends that we have identified among the readers, real-life examples of investor behaviour and some phycological facts of what drives investment decisions.

Statistics show that more than 80% of people believe that they are above average in many aspects compared to the general population. It is human nature to have confidence in your own ability and in your social standing as a human being. This results in a problem in itself since 30% of the incumbents overestimate their expertise and ability compared to the average Joe…

All of us regularly receive survey questionnaires. Think about the last questionnaire that you received where questions were asked about your ability or experience with professional services like managing your investment portfolio, or about your tax knowledge, or about anything specific that you have an interest in. How many times did you tick the box “below average” on any of the questions? I will be very surprised if any individual who manages their own financial affairs stated that their knowledge is below average compared to who they perceive to be the population who looks after their own affairs.

So now that we have established that 80% + of people believe that they are superior to their peers, let’s try and dig a bit deeper into the psychology of investing. Please understand that this is a complex topic of which many books have been written so what I am going to share here is not even scratching the surface of a complex topic.

The two  sides of money

 

Irrespective of the decisions we make in life there are always two sides that we must wrestle with to reach a decision. This applies to most decisions in life from buying a car, going on an extended holiday, renovating your house, retiring, managing your investment portfolio, and the list goes on.

The one side is the technical side where all the features and technical facts are considered and the other is the personal side that mainly gets driven by emotions.

Depending on your personality you may either procrastinate and get bogged down with all the technical issues causing a delay in your decision or you can be the compulsive type, the one who goes driving around town and comes back home with a new car (in which case buyers’ remorse may creep in) very much like investing in the current best performing fund or fad just to regret it later…

Both sides are equally important however, it is the personal side that dominates, leading to most decisions being driven by emotions.

Investments and financial planning are no different.

Dealing with the technical side, we have access to facts and figures and a host of information that we can rely on. Often all these facts and decisions spill over to the personal side and emotions take over. This leads to a scenario where investment decisions are driven by emotions, and this can be very dangerous.

We live in a society where complexities and daily challenges are fuel to our emotions. Political challenges, economic turmoil, pandemics, health, and so many investment choices are often cause to emotional drain which leads to investor behaviour that can be harmful to oneself.

In our daily interaction with investors, we encounter endless scenarios where investors are their own worst enemies. Often, we encounter, for instance, a flight to cash because of concerns of what “might happen” during a market correction or China clamping down on legislation in certain sectors, or a comment in the press by Robert Kiyosaki that we are on the brink of the world’s largest market correction ever experienced. Our advice:

Worry about what you can control, ignore the rest and consider it as noise!

The above is very easy to say. The problem is to take that decision and act on it consciously. We are often oblivious to our own shortcomings which leads to our inability to identify when our decisions are made based on emotions. This often leads to irrational behaviour. We are also far too often caught up in too much information and choices which leads to changing portfolios for the wrong reasons at the wrong times and creating portfolios that are not dynamic and without structure.

At this point, the “passive fund” brigade will interject and state that it’s easy, just invest in a passive fund and that is not a bad choice at all. The questions remain, what passive fund or funds, how much offshore exposure and in what asset classes? Investing in passive funds still takes an active decision on how and where to invest. The emotional “monkey on the back” has also still not been dealt with.

Over the past few months, several learned readers have communicated with me, and I just want to point out some of the comments made and some of the strategic flaws that were evident mainly caused by emotional confusion but also by not quite understanding the investment mandate of fund managers they considered using. This led to changing portfolios for the wrong reasons.

Reader 1

The reader wanted confirmation that the portfolio was adequate and that the fund managers used were suitable. The portfolio was a mix between passive funds, cash and balanced funds with some pure equity funds and income funds. The portfolio was changed regularly in the past due to fund manager underperformance. The reader was also concerned about certain underlying shares held within the funds and did not want funds that owned Naspers for one. The client couldn’t explain why, but it became evident it was due to comments read somewhere about Tencent and Chinese intervention.

It was clear that there was no investment strategy and that the portfolio could not meet the long-term objectives that the reader requires. Excluding funds that hold Naspers is going to reduce your choices of funds to a bare minimum and that includes passive funds since most of them own Naspers. To achieve the investment objectives a complete overall would be required.

Reader 2

The reader required confirmation that his portfolio was suitable. A large portion of the reader’s investment was in offshore feeder funds. He did not understand that there is a tax advantage by investing directly offshore compared to feeder funds with discretionary funds. The CGT difference is huge…The reader also saw the benefit of using an investment platform where more than 900 funds can be accessed. One does not need access to 900 funds to construct a dynamic portfolio. The larger the choice of funds, the more confused you are going to be when constructing a portfolio. The platform he referred to is a good platform but the platform one chooses must be for its administration abilities, accuracy, cost, and it must be user friendly, not for the number of funds it offers.

Reader 3

The reader is a self-confessed intense student of investments over many years. He also regularly interacted directly with fund managers to discuss their views. Over the years he changed his portfolio regularly often when fund managers underperformed. Two of the fund managers that he mentioned and who he is critical of is Piet Viljoen and John Biccard who both run value funds. He disinvested these funds some years ago due to their bad performance at the time. Today these two funds are the number 1 and 2 funds in the general equity space over seven years. I want to state that we do not support either of these funds and that I am not promoting these funds, I am mentioning these facts because the reader made emotional decisions. This combined with not understanding the investment philosophy of the respective managers has lost him some decent returns.

Conclusion

We are blind to our own imperfections and that includes our own emotional dominance in our decision making. I realised this in myself. I am one of the 80% who believes that I know more about investing than the average investor. I also find it much easier to invest funds for an investor than investing and managing my own portfolio. This is mainly because investing on behalf of someone else is not emotional, it is calculated and structured. For this reason, I allocated a large chunk of my investments to a discretionary fund manager to manage my investments – now I have no emotional pressure to make decisions on my own portfolio.

Global studies have shown that fund manager portfolios provide higher returns than what the investors achieve who invest in their funds and the variance is substantial. This includes local funds with all the major fund managers confirming the trend. The reason? Emotional pressure to switch out of funds that underperform or move to cash when markets move downward…

Part of a financial advisor’s duty is to make sure their clients stay the course and remain invested during trying times.

For those within the 80% of the “above average” population who have the discipline and acumen to understand the funds they invest in intimately, and who have never moved to cash during trying times, well done and keep on doing what you are doing. For the others who battle to remain sane during trying times, perhaps you should consider contracting a suitably qualified financial planner? Financial planning is much more than just recommending an investment portfolio…

I welcome your debates and questions on the above.

Stay invested and stay safe.

ADVISOR PROFILE

Marius Fenwick

WealthUp (Pty) Ltd

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