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Archives for May 2021

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Investment lessons from a 40 year veteran

David Booth is a US businessman, investor and philanthropist who has been involved in financial markets for 40 years.  Below are five lessons from his decades in the trenches which serve as a timely reminder.

Lesson 1: Gambling is not investing and investing is not gambling

A short-term bet is a punt on chance, nothing new here, however, if one treats the stock market like a casino and tries to time the market, then you need to be right twice in the game of buying low and selling high.  It’s very difficult to pick the right stock at the right time once let alone twice.

Investing on the other hand is a long-term game and while all investments carry risk, a long-term investor can manage those risks and be prepared.  Investing is buying a good quality business at the right price and holding it for a long time.  The bet you’re making is on human ingenuity to find productive solutions to the world’s problems.

Lesson 2: Embrace uncertainty

Over the past 100 years, the S&P 500, an index of the 500 largest companies listed on the US exchange has returned a little over 10% on average per year but hardly ever close to 10% in any given year.

Like most things in our lives, stock market behaviour is uncertain and whilst none of us can make uncertainty disappear altogether, dealing with it thoughtfully can make a huge difference to our investment returns and perhaps, more importantly, our quality of life.

Uncertainty can be dealt with by preparing for it.  It was Benjamin Disraeli,  former Prime Minister of the United Kingdom who was quoted as saying; “I am prepared for the worst, but hope for the best.”

If you’re prepared for uncertainty you can benefit from it when it comes along.  The recent ‘COVID’ crash presented some wonderful buying opportunities.  Without this level of uncertainty or risk, there would be no opportunity to do better than a relatively riskless return like that from a money market fund.

Lesson 3: Implementation is the art of financial science

All the research completed over the years into understanding markets and returns tell us there’s general agreement on what ‘financial science’ tells us, however, so much can be gained or lost in application.

Whilst it does help if you have one or two genuine superstars, successful sports teams execute their strategies with a greater level of consistency and discipline than the opposition.  Investing is no different.  Great implementation requires paying attention to detail, applying sound judgement and maintaining discipline through all stages of the cycle.

Lesson 4: Tune out the noise

If you’ve lived long enough you should know one thing, if an investment sounds too good to be true, it probably is.  Fads come and go and unicorns are not real.

There are a plethora of websites and pundits willing to hand out stock tips or predictions and there’s always that ‘friend’ or family member, a self-proclaimed completely fearless guru, who is happy to tell you what the next big thing will be.

Bottom line is if you don’t understand it or the person who is imparting their ‘wisdom’ can’t explain it to a sixth grader, don’t invest in it.

Lesson 5: Have a philosophy you can stick with

This one is an extension of those above.

During periods of extreme market volatility, you need to call on your levels of intestinal fortitude to avoid the trap of making poor decisions based on emotion.

We will remember the year 2020 for the rest of our lives.  It’s an example of how important it is to maintain discipline and to stick to your plan when things don’t go as planned.

By embracing uncertainty, you can focus on what you can control.  Whilst you can have some effect on how much you earn, you most definitely can control how much you spend, how much you invest and the risk level you are prepared to accept.  A professional you can trust can help here.

Discipline applied over a lifetime can have a powerful impact.  Look at those you know who are not and decide for yourself which path you would like to follow.

Please note this article provides general advice only and has not taken your personal, business or financial circumstances into consideration. If you would like more tailored advice, please contact us today.

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Your age can have a significant impact on your risk profile

Risk profiling in financial plans

Clients often wonder why as advisers we explore client’s risk profiles, and what does it really do? Risk profiling is a process for determining appropriate investment asset allocations for each investor.  There is no right or wrong answers, only what suits you.

The key components for establishing a risk profile are:

  • What is the level of risk the client is comfortable taking?
  • How much financial risk can a client afford to take?
  • How much risk is required to achieve the goals with the financial assets at the client’s disposal?

What risk is a client willing to take?

At some point you will have encountered the classic risk vs return curve, that is to get the most return you must take the most risk.  The lure of the high prize must be traded off against the risk of significant loss.  Like at a casino, the odds are not always in your favour and a high-risk strategy can see high volatility and sharp rises and falls in a client’s portfolio. This may appeal to some clients but to others, this is a nightmare, it could mean an extension of your working career rather than early retirement or vice versa. Generally speaking, age is often a key factor associated with risk tolerance, the younger we are the more risk we are willing to accept and as we age, we slide back along the risk curve to a less risky asset allocation.  This is often termed as reducing “sequencing risk”.

How much financial risk can a client afford to take?

This component will often consider two items, stage of life and the number of assets available.  The younger we are, we have greater time to recover and rebuild from a financial setback.  Similarly, if we have a higher amount of financial assets at our disposal, we may choose to allocate a higher percentage of these targeting greater returns knowing we still have a sound financial base to fall back on.

How much risk do my goals need?

Something that many people ignore is that to achieve their goals, they simply do not need to take excessive levels of risk. The ability to recognize and discuss this is something to work through with your financial adviser.  Similarly, sometimes goals require a level of risky investment that is inappropriate to a client.  Discussion over conflicting goals and risk is very important to ensure you get the right investment plan for you.

Through each of these components of risk profiling, there are some common factors and gaining an understanding of these factors for each client is critical in the development of financial plans:

  • Goals – what is it, how much, and what is the priority?
  • Timeframe – what is the timeline for each of your goals?
  • Investment capital – how much do you have to build wealth?
  • Client age – how far into your life cycle are you?
  • Liquidity, Income and Growth – do you require liquid funds for lump sum expenditure, do you require regular income from investments, are you focused on growth only?

In summary, the main issue isn’t if you have a high growth, balanced or conservative profile, the most important aspect is that your risk profile reflects you and your personal circumstances. Risk profiling is important for an adviser to review regularly with clients to ensure the clients’ thoughts and preferences have not changed over time and that the investment remains appropriate.

Please note this article provides general advice only and has not taken your personal, business or financial circumstances into consideration. If you would like more tailored advice, please contact us today.

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