We are all told that trading is risky and should be left to the professionals, so why don’t we educate ourselves? Time is usually the biggest factor because we are too busy trying to make money we outsource the management of that hard earned money to a professional to provide that service.
In our opinion it isn’t a wise use of money unless your professional advisor practices what they preach, so far we have yet to come across one! The management fees paid to fund managers / financial advisors is analogous to paying a life guard (who can’t swim) to supervise you while you’re in the water.
So what do financial advisors train for? Shouldn’t they be using the skills they developed and prevent you losing your retirement fund? And what is the alternative? Being educated enough to ask the right questions is the first step.
In our previous blog we spoke about the ability to buy options to protect your portfolio from crashing, but from our experience fund managers and financial advisors don’t do this with your money. What we have discovered is that financial advisors aren’t educated on options and the vast majority of retirement funds don’t allow it. Why don’t you ask your financial advisor, “I’ve heard that if the market is crashing we could buy a put option to hedge against our portfolio going down, is this possible?” Most likely they won’t know what that is or they will sprout the standard line that “options are too risky”!
What financial advisors are good at is asking you to complete a risk assessment and putting your money into a corresponding standardised fund with a mix of investments so that you are “diversified”, which they will tell you is reducing your portfolio risk (we’ll come back to this in another blog). This is the easy part, but what happens when the investment isn’t working? How are decisions made about your money? And what are those decisions based on…. your risk profile. The questions are tailored to the passive and uninformed investor. We completed such a questionnaire and were shocked at the rudimentary approach to investing, we were deemed to have a low risk tolerance. Here are the examples from our assessment and why they aren’t good questions to assess risk:
Choose the answer that best describes your agreement with the following statement: “I am comfortable with investment returns that may frequently experience large losses in value if there is a potential for higher returns”
1. Strongly disagree
3. Somewhat agree
5. Strongly agree
You have £10,000 and it falls by 20% to £8,000, you still have 10 years before retirement do you
1. Do nothing
2. Change your investment immediately
3. Wait 3 months then change
4. Wait 1 year then change
This was our thought process…
- How quick was the loss? Is it a downward trend or a news event?
- What is the volatility in the market?
- What are the fundamentals of the company? Was it earnings? How are they doing?
- What is their earnings per share (EPS)
- Is this correlated to an overall market move (i.e. systemic), is this another 2000 or 2008 crash
- Also, since you charge me huge management fees to manage my money what am I paying you for if I’m to make the decision?
So you’ve answered these basic questions, your money is invested and there’s another market crash (as there inevitably will be). What happens next? Depending on how much money you’re paying them you may get an email or a call from your financial advisor, but you certainly won’t get one from your 401k or pension fund. Don’t forget that institutions don’t want everyone withdrawing from their positions as it will only perpetuate a crash! Markets go up and down and you just have to ride out the wave, right? If you’ve read our earlier blog you’ll know our opinion on that.
So as an individual what do you do? We were six months into our education when we started asking these questions and frankly bamboozled our financial advisor. We now feel capable of monitoring the markets relatively quickly and identifying if there is a risk of a crash, we unfortunately don’t have the same confidence in our financial advisor spotting this with their many years of experience, a qualification and a title.
Since you are the person with the biggest vested interest in your savings you need to ask yourself whether you want to blindly leave the management of your hard earned money to someone else (who frankly doesn’t care if you have to work longer or have a modest retirement), or if you want to get educated and get involved so that you can start to reduce your risk. The first step is to ask the right questions.
I’m sure we all know someone who had to delay their retirement or had their retirement lifestyle significantly impacted due to a market crash, but this doesn’t have to be you. Quite famously, not everyone lost money, some people become rich off crashes including private investors, smaller funds and large banks who read the signs and bet against the market with options. Check out the Big Short. I’m sure we all know which category we’d prefer to be in.
We should be minimising losses and maximise gains, it’s that simple.