We are living in troubled times. People are genuinely in fear for their lives. This month, I talk about the real value of a high-quality financial adviser.
A volatile market
Many would agree that the impact of COVID-19, like some previous pandemics and other world events, has led to well-publicised stock market volatility in the last few months. However, stock market volatility is arguably one of the most misunderstood concepts in investing. Simply put, volatility is the range of price change a security experiences over a given period of time. Volatility in the stock market is often used as a gauge of fear in the market but volatility is healthy – without it, one would never make a return on one’s investment!
Stock prices primarily reflect investor beliefs about the value of a company. Changes in human behaviour and beliefs can cause the value of a company to change due to the market forces of supply and demand. Stock prices can change due to biased or emotional decision making (investor psychology). Emotion is running high right now.
There will always be people who don’t see the value of a financial planner and decide to go it alone. They are often the people who will ask a financial planner ‘why don’t I just DIY?’. They can be inclined to think that beyond preparing the financial plan and the asset mix, unless we are constantly striving for ‘outperformance’ we aren’t delivering value.
A recent report by JP Morgan* shows us that between Jan and September 2020 almost £140bn moved out of equities into cash. To put that into context, £140bn is the annual cost of running the NHS!**
Humans are wired to think that when an investment is rapidly rising in value its risk is declining and profit potential is going up. We can often think “everybody seems to be getting rich, except me!” Conversely, when investments are falling in value, return is declining and risk increasing, people can think “I don’t want to be the only one to lose money, so I’ll sell!”
Looking at these behavioural patterns further, during the period from 1990 (the year Nelson Mandela was released from prison, Margaret Thatcher resigned as PM and Milli Vanilli’s lip syncing scandal was in the news) to 2020, the S&P 500 (the stock market index that measures the stock performance of 500 large companies) returned circa 10% per annum and the average equity investor received only 5% return per annum. A difference of nearly 100%!!***
The real value of a high-quality financial planner
In my view, 75% of the true value of a high quality financial planner lies in his or her skill in understanding and managing investor behaviour, even more so in times of uncertainty, with only 25% being the creation of a plan and asset mix. I like to look at an adviser’s fee like an insurance premium to protect against the risk that one day you will have a (very) human impulse to cast the plan aside because of current events, whether they be disastrous or marvellous.
I have seen many difficult markets come and go and can certainly empathise with people who find the current environment troublesome and disturbing.
A high-quality financial planner would like to help, if they can, and to that end here’s what we offer – a cup of coffee and a second opinion. My contact details are below.
Raj Shah is founder of Blue Wealth capital and has been shortlisted for Financial Planner of the Year and Investment Adviser of the Year.
*JP Morgan Guide to Markets 2020 (UK Q4). ** https://www.networks.nhs.uk/news/health-and-social-care-funding-explained. ***DALBAR’s annual Quantitative Analysis of Investor Behaviour (QAIB 2020)