As a private wealth adviser, if l was given a dollar for every time l was asked at a social gathering (remember them?) where l thought the sharemarket, the dollar, interest rates or the economy were headed, l would indeed be a very wealthy man.
It’s a myth that dies hard—the idea that any type of financial adviser is a market prophet with special powers for foreseeing the next big boom or bust. Despite this, there are still some advisers/wealth managers who position themselves as smart forecasters or market timers, despite the overwhelming evidence that shows its lack of success for their clients.
The best advisers, however, will tell you they have no idea where the financial markets are headed. They can’t tell you which will be the top and bottom performing shares and asset classes this year or what Central Banks will do with interest rates.
Of course, there’s nothing wrong with having an opinion on the economy, the efficacy of government policy or what the markets might do next. But good advisers know that’s the sort of conversation best held at a local watering hole, not in the context of planning a client’s financial future.
A financial plan should not be shaped by market forecasts. Rather, it should be shaped according to the needs, goals, risk appetites and life circumstances of each individual client. In this sense, good financial advisers are not experts in prophecy but in possibility.
They start by spending time with clients or prospects to learn about them. They need to know not only about their assets, liabilities, income and living costs, but also about their aspirations and expectations. From there, goals are set for the short, medium and long term.
The adviser connects those goals to a set of tailored financial and portfolio strategies that gives clients the best chance of both achieving their goals and sticking with their strategy along the way. A short-term market forecast isn’t required.
The key to earning a decent long-term return is not market timing or stock selection, but diversification and discipline. The sharemarket will have more good years than bad, we know that. But there will be bad years, so a plan needs to accommodate those by including bonds and other defensive assets.
Not every sector of the investment market will perform well at the same time, which is why a plan will diversify across and within many asset classes and sharemarket sectors. That means having exposure to large and small companies, value and growth stocks, and developed and emerging markets.
Cost is another determinant. The fees paid to fund managers and stockbrokers can be a significant drag on the returns delivered to clients. The plan should consider the most efficient solutions. Taxes, too, can make a difference between the advertised returns of various strategies and what ends up in an investor’s pocket. A good financial plan takes account of that.
Finally, no plan is ever set in concrete and forgotten about. There are two reasons. First, markets are always changing. This can move clients’ portfolios beyond the bounds of their risk appetites.
Second, people are always changing. We change careers, relationships, build families, move to a new house, and face periodic challenges with our health and external circumstances. Plans need to be reassessed, portfolios rebalanced, and goals reset, if necessary, to accommodate all of that.
The point is that none of this requires making bets on the future. It requires a financial plan that accommodates a wide range of possible developments and builds strategies to deal with whatever arises—an economic recession, an industry restructuring, a marriage breakdown, a health crisis. In other words, the most important element is what is going on with the clients themselves and their lives.
The many variables that make the nightly TV news—geopolitics, rising markets, falling markets, currencies, interest rates, commodities—are all very interesting and we can debate them until the cows come home. But absolutely none of that is within our control.
What a financial plan does is start from what we can control. It starts with understanding each client’s goals and preferences, building strategies that maximise the chance of meeting those goals, managing risk through diversification, controlling costs and taxes, exercising discipline and regularly rebalancing.
The controllable stuff may not be as interesting as the big political or market story of the day. But it’s here where the best advisers make the real difference.
To find out more about how any of these measures may be of assistance in your individual circumstances, please contact Gordon Thoms or David Conte at Calibre Private Wealth Advisers on ph. (03) 9824 2777 or email us here.
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