Noth­ing – if they did it right the first time, writes Maya Fisher-French

CityPress - - Business -

An ad­viser should en­sure that any in­vest­ment port­fo­lio matches your long-term risk and re­turn re­quire­ments right from the start, and should there­fore not be switch­ing due to the volatil­ity in­her­ent in eq­uity in­vest­ments.

Carol Ax­ten, CEO of wealth man­ager Well­sFaber, says the key role of a fi­nan­cial plan­ner is to ed­u­cate clients at the start of the re­la­tion­ship about what they can ex­pect from their port­fo­lio and how to man­age the emo­tional side of in­vest­ing.

“We show clients that they are in­vested for the long term and that what may to­day seem like a big event is re­ally a tiny event in the greater scheme of things,” says Ax­ten, who adds that they have not had any clients phon­ing to switch their port­fo­lios as they un­der­stand the in­vest­ment strat­egy.

“Un­for­tu­nately, some ad­vis­ers feel that they need to make changes to jus­tify their ad­vice fee, but the ad­vice fee is for the re­search and anal­y­sis that goes into cre­at­ing the plan and se­lect­ing the right in­vest­ments, as well as the on­go­ing re­la­tion­ship. We don’t have to switch to show value,” says Ax­ten, who is also con­cerned about in­vestors or ad­vis­ers who switch be­cause a fund is un­der­per­form­ing in the short term.

“It’s easy to get caught up in the panic and sell out of an un­der­per­form­ing fund, but then you miss out when the style or in­vest­ment strat­egy of the fund man­ager pays off.”

This idea of “chas­ing fund man­ager re­turns” can ac­tu­ally make us poorer. In­vestors tend to chase past re­turns, so unit trusts that have per­formed well over the past year re­ceive mas­sive in­flows, while those whose re­turns have dipped see out­flows.

Carl Late­gan, head of in­de­pen­dent fi­nan­cial ad­viser dis­tri­bu­tion at Al­lan Gray, ar­gues that it is pre­cisely this be­hav­iour that is the big­gest culprit in wealth de­struc­tion.

“Time and again, we see in­vestors dis­in­vest when per­for­mance dips and then they come back when per­for­mance im­proves. The is­sue is that they don’t ben­e­fit from the uptick be­cause they usu­ally re­spond af­ter the unit trust has done well. An im­por­tant part of the value of an in­vest­ment is de­stroyed by this be­hav­iour – try­ing to time the mar­ket re­sults in in­vestors buy­ing high and sell­ing low, which means that in­vestor re­turns are of­ten lower than the re­turns of the unit trusts in which they in­vest.”

To il­lus­trate how this be­hav­iour af­fects re­turns, Al­lan Gray an­a­lysed in­vestor be­hav­iour over the past two years re­gard­ing its Al­lan Gray Bal­anced Fund. Keep in mind that the ra­tio­nale be­hind in­vest­ing in a bal­anced fund is to pro­tect your in­vest­ment against the more dra­matic mar­ket move­ments in a pure eq­uity fund, as a bal­anced fund also in­vests in cash and bonds.

In­vestors who re­mained in the fund for the full two years, de­spite a fall in per­for­mance be­tween Jan­uary and November last year, would have had a to­tal re­turn of 20.12% over the two years. How­ever, due to the un­der­per­for­mance of the fund rel­a­tive to the mar­ket dur­ing that pe­riod, the fund saw sig­nif­i­cant out­flows. Yet the ma­jor­ity of th­ese out­flows oc­curred mostly af­ter the un­der­per­for­mance and at a time when the fund was ac­tu­ally re­cov­er­ing; those in­vestors lost out on about a 6% out­per­for­mance of the mar­ket by the fund.

This is be­cause we re­act to past per­for­mance and not fu­ture po­ten­tial.

Per­fect science would have us in­vest­ing just as the fund per­for­mance recovers and we’d switch to an­other fund just as the fund is un­der­per­form­ing. The prob­lem is that such per­fect science does not ex­ist and the cost im­pli­ca­tions of chang­ing funds can only eat fur­ther into your po­ten­tial re­turns.

As US writer and in­de­pen­dent fi­nan­cial ad­viser Carl Richard says: “In­vest­ing based on past per­for­mance is like driv­ing while look­ing in the rear-view mir­ror … It leads to a lot of ac­ci­dents!”

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