Topic: Uncategorized

Worry Isn’t Something We Value

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I worry about money and I bet you worry about it too.

But, here’s the interesting thing: I’ve never worked with anyone who identified “worry” as something they valued. So, why do we let worry about money drive so much of our thinking and decision making?

My experience suggests our worry comes from trying to have power over things outside of our control. For instance, we can worry about whether we’ll ever have enough money to retire. We can also worry about whether we’ll have enough money to help our kids go through university and get on to the housing ladder. All of these goals are important.

However, we’ve got to realise that even if we do everything within our power, we may still come up short. We humans have a hard time accepting this outcome. We want to believe that doing and trying will always be enough to overcome every obstacle between us and our goals. So what’s the alternative?

This leads me to a crazy idea: what if we commit to doing everything we can, then, we just let go? We let go of the worry; we let go of the fear; we let go of trying to control things we can’t control.

Yes, this idea might sound radical. And yes, telling someone to “stop worrying” is easier said than done. But I’m astounded at the number of people who’ve never considered this option.

I suggest that we treat worry as a sign that we need to revisit the things we’ve said we value most. Using these values, we can begin to work out if our worry is really worthwhile, or if we’re focused on the wrong thing.

Are we really doing everything we can, like sticking within our budget and meeting our savings goal? If so, take a step back and recognise that worry doesn’t need to play a lead role in our financial decisions.

 I understand that banishing worry isn’t easy. But there’s so little to lose, and so much to gain, if we can learn to put aside the worry and focus on what we can control when it comes to money.

Our seven hats

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What is a financial adviser for? One view is that advisers have unique insights into market direction that give their clients an advantage. But of the many roles a professional adviser should play, soothsayer is not one of them.

The truth is that no-one knows what will happen next in investment markets. And if anyone really did have a working crystal ball, it is unlikely they would be plying their trade as an adviser, a broker, an analyst or a financial journalist.

Some people may still think an adviser’s role is to deliver them market-beating returns, year after year. Generally, those are the same people who believe good advice equates to making accurate forecasts.

In reality, the value a professional adviser brings is not dependent on the state of markets. Indeed, their value can be even more evident when volatility – and emotions – are running high.

The best of this new breed play many roles with their clients, beginning with the needs, risk appetites and circumstances of each individual, irrespective of what is going on in the world.

None of these roles involves making forecasts about markets or economies. Instead, the roles combine technical expertise with an understanding of how money issues intersect with clients’ complex lives.

Indeed, there are at least seven hats an adviser can wear to help clients without ever once having to look into a crystal ball:

  1. The expert: Now, more than ever, investors need advisers who can provide client-centred expertise in assessing the state of their finances and developing risk-aware strategies to help them meet their goals.
  2. The independent voice: The global financial turmoil of recent years demonstrated the value of an independent and objective voice in a world full of product pushers and salespeople.
  3. The listener: The emotions triggered by financial uncertainty are real. A good adviser will listen to clients’ fears, tease out the issues driving those feelings and provide practical long-term answers.
  4. The teacher: Getting beyond the fear-and-flight phase often is just a matter of teaching investors about risk and return, diversification, the role of asset allocation and the virtue of discipline.
  5. The architect: Once these lessons are understood, the adviser becomes an architect, building a long-term wealth management strategy that matches each person’s risk appetites and lifetime goals.
  6. The coach: Even when the strategy is in place, doubts and fears will inevitably arise. The adviser at this point becomes a coach, reinforcing first principles and keeping the client on track.
  7. The guardian: Beyond these experiences is a long-term role for the adviser as a kind of lighthouse keeper, scanning the horizon for issues that may affect the client and keeping them informed.

These are just seven valuable roles an adviser can play in understanding and responding to clients’ whole-of-life needs that are a world away from the old notions of selling product off the shelf or making forecasts.

For instance, a person may first seek out an adviser purely because of their role as an expert. But once those credentials are established, the main value of the adviser in the client’s eyes may be as an independent voice.

Knowing the adviser is independent – and not plugging product – can lead the client to trust the adviser as a listener or a sounding board, as someone to whom they can share their greatest hopes and fears.

From this point, the listener can become the teacher, the architect, the coach and, ultimately, the guardian. Just as people’s needs and circumstances change over time, so the nature of the advice service evolves.

These are all valuable roles in their own right and none is dependent on forces outside the control of the adviser or client, such as the state of the investment markets or the point of the economic cycle.

However you characterise these various roles, good financial advice is ultimately defined by the patient building of a long-term relationship, founded on the values of trust and independence and knowledge of each individual.

 

 

 

 

MasterChef of Investing

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I’m a big fan of the MasterChef TV programme and, as this week is the final of the current series, I decided to ignore all the election stuff and illustrate the similarities between MasterChef and investing.

Image courtesy of the BBC

In the programme contestants face a series of cooking challenges and many things can and do go wrong – low quality ingredients, inadequate preparation and poor implementation all play their part. Investing can be a bit like this too.

The world of investment consists of two broad approaches. The first is the traditional active one, where managers try to find mis-priced securities, or seek to time their buy or sale points in the market. This is similar to the challenge in MasterChef, when a contestant has to invent a new dish within a set time frame. The chef commits to their chosen recipe, but ends up racing against time locked into particular ingredients to create a single dish. It may work out, but if they lose attention for a moment then the dish is ruined and they have nothing to fall back on.

Likewise, the active investment manager locks in on his best ideas and finds himself with little flexibility to move; he is restricted by time as he’s trying to trade on information he believes is not reflected in the prices of the stock. If it doesn’t work, he does not have a Plan B.

If you plan to stand out from the crowd, you are going to build cost and complexity into your process. Using a cooking analogy, the price of ingredients (out of season asparagus, for example) is going to be secondary to making an impact. Once you have committed to your dish, there is no changing tack.

The second approach to investing is when the investment manager seeks to track as closely as possible to a commercial index. The goal here is not to stand out – this is most like the challenge in MasterChef, where the contestants have to cook a standard popular dish with set ingredients.

In this case, the ingredients (or investments in the case of the investment manager) are known and it is just a matter of assembling them. The drawback of this particular approach is the absence of flexibility. The dictated menu may not suit everybody; it may be the best lasagne in the world, but if your diners don’t like pasta you have a problem.

However, what if there was a system that combined the creativity of the first approach with the simplicity of the second? In this case, the focus shifts from being different for the sake of it, or following someone else’s recipe, to drawing from a range of ingredients to produce a diverse menu that suits a range of tastes.

In this third approach, our contestants do not face unnecessary constraints in terms of time or ingredients. Instead, they assemble a broad selection of dishes from multiple ingredients suitable for the season and at a time of their choosing. The difference here is that the chefs are focusing on what they can control and eliminate elements that may restrict their choices. The ultimate aim is to efficiently and reliably provide meals that suit a range of palettes.

In the world of investing, this third way is the optimal approach. Picking stocks and timing the market, like making brilliant off-the-cuff meals – in any condition, in an efficient and consistent manner – is tough even for the master. Cooking meals off a provided menu (index managers) can be inflexible and costly.

The third way is what we believe in and why we choose investment managers who do not have to outguess the market to get a good result. They do not have to lock in on a couple of their best ideas and hope they turn out, and neither do they have to contract the job out to a commercial index provider. They design diverse funds that take advantage of the aspects of expected returns and build flexibility into the system, so that an efficient and reliable investment solution is served.

The MasterChef of Investing.