Category Investments

The role of financial adviser in long-term savings

20 July 2010 Gareth Stokes
Gareth Stokes, FAnews Online Editor

Gareth Stokes, FAnews Online Editor

The key ingredient for long-term investment success is discipline. Very few individuals have enough discipline to create and follow through with a long-term savings plan. There’s always something getting in the way. Monthly payments to a unit trust fall away when the hot-water geyser bursts, pension fund benefits disappear on a trip to Mauritius and the annual bonus is sucked into the black void of credit card debt. July is savings month and we’re trying to remain focused on this important topic in our Monday to Thursday newsletter.

The best way to improve your saving track record is to find someone who can assist you with both planning and implementation. Jeanette Marais, director of distribution and client services at Allan Gray observes: “Many investors seek financial advice to help them make sense of the wide range of investments available and choose the best one for them, but financial advisers can also play a very valuable role in helping investors apply discipline and structure to their investment process.”

Emotions make speculators of us all

Investors who actively manage their own funds often base their decisions on short-term market movements. This emotional response flags them as speculators rather than investors. Speculators are always trying to maximise market return. They want to sell out of a position as quickly as possible and then reapply their capital to the next ‘hot’ opportunity. But investors who jump in and out of the market repeatedly in an attempt to improve their overall return usually end up worse off. This fact has been proven in numerous market studies.

If you avoid emotion and stay invested for the long term (barring sensible decisions to change asset allocations) you qualify as an investor. Allan Gray says investors aim for long-term returns, in both income and price gains. “Once you’ve chosen an investment, your ability to make the most of it depends on whether you remain committed to it for long enough to benefit from the potential returns, smooth out the inevitable short-term ups and downs and let the power of compound interest increase the value of your money and compensate you for the costs of investing,” says Marais. Sound simple? It’s not always that easy.

The role of the financial adviser

If you hope to retire comfortably you should be saving approximately 15% of your gross salary over your entire working life. The experts say if you do this for 35 years (from age 30 to the retirement age of 65) you should be able to begin retirement on 75% of your final working salary. And this should be enough to secure a similar standard of living through retirement. Of course it helps if you tuck away a bit extra by way of discretionary savings.

Your financial adviser can offer crucial support in this regard. They can make sure your asset allocation is suitable for your life stage – and offer guidance on financial instruments to meet specific investment goals. And best of all – they can help with your investment discipline. “Financial advisers play a very valuable role in helping investors apply discipline and structure to their investment process, especially when emotions prompt them to act like speculators,” says Marais. An independent adviser should coach you through periods of market volatility.

Marais adds: “People should not need an adviser to consider returns, risk, time horizon and cost before making a decision, but many advisers agree they add a large part of their value by simply helping their clients to be disciplined about managing their finances and about making, and acting on, sound savings and investment decisions.”

The greatest investor of all time

Allan Gray says investors who buy and sell at the wrong time fail to achieve the average returns of the funds they’re invested in. They tend to sell their investment in favour of the best-performer from last year, or dump their holdings the minute their preferred fund goes through a bad patch. This is the wrong way to go about investing as so-called ‘performance bias’ decimates annual compound returns over time.

A disciplined investment strategy helped US investor Warren Buffett become one of three richest men in the world. He has shared his strategy with shareholders in his Berkshire Hathaway holding company, which delivered an average of 20% annualized gain over the past 46 years. He beat the top performing mutual funds (US equivalent of unit trusts) by a huge margin. The Fidelity Magellan Fund returned 16.3% a year, on average, and the Templeton Growth Fund 13.4%.

How does he do it? You can get a sense of his investment strategy from some of his oft-repeated statements. Here are the ‘top three’ – in our view – in support of the long-term saving theme. First: Our favourite holding period is forever. Second: Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years. Third: We don’t get paid for activity, just for being right. As to how long we’ll wait, we’ll wait indefinitely. If you prefer investing directly in the market, Buffett advises: “We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.”

Editor’s thoughts: Warren Buffett is a legendary value investor, and it’s unlikely any of us will accumulate the kind of wealth he’s accumulated. But he’s a good role model for anyone aspiring to be a disciplined investor… Are you guilty of selling out of a unit trust investment after a particularly poor annual performance? Add your comment below, or send it to

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