When it comes to investing your hard earned money, most people want the highest possible return and the least possible risk. Sound familiar? Well there is no such investment that gives you the highest return available with the lowest risk on your capital – sorry to burst your bubble. We typically find ourselves either taking on too much risk or too little risk to achieve our desired objectives and the problem all starts because we haven’t determined how much risk we need to take in order to achieve the investment return because we haven’t determined what the investment return is even for.
Most people view a Financial Adviser as someone who invests their money with the objective of delivering an investment return. That’s why most people only tend to meet with an adviser when they feel they have some money to invest. In their minds they have been doing some financial planning along the way to get them to the point where they have saved up some money and now need the services of an adviser and the service they require is for the adviser to invest there money in the best investment. The best investment you say? Which one might that be? Well, the one with the best returns, OBVIOUSLY.
I hope you can see where I am going with this, there is no ONE best investment out there and there is no one investment with cash like volatility and equity like returns. It doesn’t exist, I can’t make it exist, no one can promise you those types of returns. So what happens? The adviser after receiving his completely unrealistic mandate from you the client puts together a portfolio with the aim of achieving your mandate (knowing full well that its impossible, but feeling he needs to prove himself). Ultimately he assess your appetite for risk and desire for return and whichever one he feels you will be more satisfied with, that one drives the portfolio. He may put you in an equity portfolio and tell you its a long term game this investing thing, or put you in cash and tell you equity markets are too high now a crash is coming, cash is king. Either way he is never going to meet your expectations and you are going to have sleeplessness nights EVERY NIGHT, worrying about what’s happening in “the markets” because that’s where your money is invested and you will feel the need to call him EVERY DAY to see what investment choices he has made to make sure he is delivering on your ridiculous investment mandate, which he agreed to in the first place.
So what’s the alternative? Well, the “industry” first needs to take some accountability. The financial products industry has driven the behaviour of clients to make unrealistic demands as illustrated above and think they are achievable. The financial adviser industry needs to take some accountability in that, we should never agree to ridiculous mandates as illustrated above, but because they want to prove their worth for that initial 1% and the annual 1% fee, they do. Lastly, clients need to take some accountability as well, as we all know nothing in life is free. There is no free lunch, you cannot expect all the returns with none of the risk, if there was such an investment you would do it yourself and wouldn’t come to the financial adviser in the first place.
I have a theory that I am busy implementing in my practice: What if your investment objectives were guided by your lifestyle needs? Ok, not my theory but something I do practice. My real theory is this: If we can identify the things most important to you now and into the future, we can identify the potential trade offs you would need to make now and into the future. Once we understand and agree on the trade offs we can then put your money in places that you won’t have to worry about. The money will be guided by what you want to do in your life now and into the future and your life will NOT be guided by what the money does now and into the future. Imagine not having to worry about what impact the 5th change of finance minister is going to have on your money, not having to worry about the fact the the JSE is at its lowest levels for the year or that it is down 8.94% YTD. Why wont you have to worry? Well, because you are not invested in the investment with the highest return and highest volatility,your financial planning has guided you to make more prudent life choices and has not forced you to invest in the most volatile investments in search of unachievable returns in order to live your desired lifestyle. You have put your life at the center of your financial plan and not your money.
This all starts by having the conversations with a Financial Planner earlier on, before you think you are now “ready to invest”. A true lifestyle financial planner needs to find out about you and what makes you tick, what was important to you in the past, what is important to you now and into the future and most importantly WHY. It takes time, but it’s worth it. Once the conversations are had and translated into cash flow modelling you will both have an idea of what you can and cannot do at different stages in your life, you can then make those trade off decisions and then invest the money in places you are most comfortable doing so.
Wouldn’t it be amazing if everytime something happened in our economy, your first thought isn’t about your investment portfolio. What if you could go to bed at night knowing you are living the life you want, not because your investment is growing at 50% a year, but because you have made prudent choices about the things most important to you now and into the future. 50% is great, but what about when its -50%, do you stop living? Get your head out of the news and into my office and lets start living your best life.