Why investors should leverage the experience of their financial adviser when making decisions
‘Everyone has a plan until they get punched in the face,’ were the words of boxing legend, Mike Tyson. Nowhere is this sentiment more appropriate than in the world of financial markets, where even the small changes can undermine the success of a financial plan.
The role of the financial adviser in uncertain times is to help investors take proactive steps towards ensuring that their financial plans are realised while responding rationally and appropriately to market volatility.
Developing “financial fitness”
Investing can sometimes be an emotional rollercoaster and unfortunately, the urge to act impulsively when markets show signs of volatility can be difficult to resist. An overwhelming body of evidence continues to demonstrate that when investors try to time the market and make snap judgements in response to fluctuations, the resulting decisions can have far-reaching negative consequences.
Recent research by Momentum indicated that between March and December 2020, investors reacted hastily to the onset of the pandemic, initiating R1.5 billion in switches based on ‘gut reactions’ to market movements. The net loss of these switches, however, amounted to nearly R100 million, leaving these investors worse off when a degree of stability returned and markets started to recover.
A big part of value proposition of a financial adviser is in sharing “non-technical” skills with their clients, such as how to avoid acting impulsively in moments of fear and how to build a solid, sound financial plan and calmly see through its execution. Becoming “financially fit,” involves discipline, trust and lots of practice.
Translating planning into action
Market volatility is not the only factor to plan for. One of the biggest mistakes that investors make is not following through on their financial plans or abandoning them when circumstances change. Unexpected life changes, sabbaticals, retrenchments, career overhauls and divorce, are just a few of life’s many potential “curve balls.”
Financial plans need to be robust but also highly adaptable, with enough guardrails to account for the unexpected. And once a financial plan has been established, preparation needs to be followed by action. Here, the financial adviser will play a key role in ensuring that an investor’s plan is in line with their changing circumstances and lifestyle needs but also to prompt the right kind of action in the right direction.
Another one of the biggest pitfalls that investors fall prey to, is compartmentalising their financial needs and creating siloes within their portfolios, instead of taking a holistic view. For example, investors often see their goals as individual targets instead of part of one, overarching financial plan.
In doing so, they may treat these investment goals as single investments, siloed against the rest of their portfolio. This, in turn, may lead to investors comparing one portfolio against another; like for like, without taking into account the complementary roles that assets play within a well-diversified portfolio, or the different long-term goals of the investors.
This could lead to investors switching too often or prematurely (driven by fear or greed), so that they end up with a portfolio that is not strategically diversified to help mitigate external and internal risks.
Financial advisers as part of the journey
Sometimes, the most constructive action that an investor can take is to step away from monitoring their investments and look at their portfolio holistically. A financial adviser can provide this outside perspective and help investors to understand how all the “working parts” of their portfolio operate together towards realising their goals.
Both investors and advisers should have a clear understanding of what the role of the adviser entails. While advisers play a key role in helping clients construct a financial plan according to their dreams and aspirations for the future, financial advisers are also coaches and mentors. Investors can (and should) lean on their advisers for support, guidance and intervention throughout their financial journey with the aim of ensuring successful investment outcomes.
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