Coming into this part of the industry recently I decided to study the concept of financial planning and it quickly dawned on me it was a little more complex than being ‘sold’ a product!
I was asked the other day whether my job was essentially to be a paid gambler of another person’s money! It’s an uncomfortable question but one that deserved some thought.
The concept of financial planning was alien to me until recently. I often questioned what the point was of having someone to tell you what “product” you should buy and for them to then take a hefty fee for the privilege. To be fair I thought I could easily select a product and cut out the middleman!
Let me tell you something; I am a little bit geeky! Coming into this part of the industry recently I decided to study the concept of financial planning and it quickly dawned on me it was a little more complex than being ‘sold’ a product!
To explain further, I want to share my life goals.
The big question for me has always been what do I want to do? I am 48 and I don’t want to retire anytime soon, and in fact I would be happy to do the job I do for as long as is humanly possible. I know it is unusual but I love my job, and I like the clients we work with.
But I do want to have a work / life balance where I perhaps work fewer hours, and can go and travel with my wife around Europe to visit music festivals over the summer (I like the concept of sitting in a field listening to music with a laptop still doing my work!). I also want to be able to give my time to help others. I am not sure when this will be but it could be within the next fifteen years.
That’s my plan, so how do I achieve it? If I work fewer hours I will be paid less, and how will I fund travelling around Europe? Logically over the next few years I need to save some money to achieve this goal, but how much, where do I invest it and how will I receive money back from it?
This was the realisation that financial planning is much more than a product. And of course, my goals are only a part of the equation. I know I will die (that is certain); if I die before my wife I want to make sure she is financially secure, and when we both die I want there to be something for the children. That is a lot to consider.
In my geeky role, I set about developing a simple spreadsheet which showed me potential future values based on the investments I hold now. This allowed me to select a level of ‘income’ from it and project forward to see how long my assets would last. This was a massive eye opener because it started to expand on my plans and really give me an insight to whether the dream was possible. But for everything the spreadsheet told me I knew I needed help.
So, I have a financial planner (even though I work for a financial planner!) and they are there to help me achieve my goals. Yes, I have a pension, an ISA and I am sure down the road other tax efficient investments but they are there to keep me focused on the end goal. They have also helped provide for my wife when I die, and to leave a financial legacy for our children (through an old final salary pension scheme (perhaps a topic for another blog)). When I consider it in that way the money I pay to the financial planner is worth every penny.
Every year we will sit down and talk about our plans, and whether anything has changed and then we can adjust things to reflect this.
And this leads me nicely to the question about my job, ‘am I a paid gambler’?
Growing your wealth slowly
A few years ago, I thought I was a bit of a player! During the nineties, our money seemed to go up each year by about 15 or 20% and I thought I was pretty good at investing money. Towards the end of the decade I saw some funds returning 100% and I thought well that’s easy money. Quickly I sold most of the investments and started to invest in those funds which were “guaranteed” (in my mind) to double our money….well sadly that was not the case. What followed was years of chasing the losses. The gambler!
Did I learn? In 2011, I had a small pension pot and I knew I had to do something about it. At the time, it was pretty easy to make money so I bought shares like Lloyds, National Express, Amazon to name just a few. I did well; my pension fund doubled and I thought ‘I can do this’! I thought about the next big thing and started investing in the likes of Boohoo, AO.com, Just Retirement and so on. With Boohoo, I saw the shares half in value over night; I managed to get out of AO just in time and Just Retirement, well that’s another story. Do I own any shares now? The answer is no. From 2014 to 2016 my pension fund flatlined; where I made gains in one share, I lost in others.
This is gambling-when it comes to money. There is absolutely nothing wrong with doing this, but it made me understand that you need to spend a lot of time doing the research, and you must accept that you could lose all or some of your money. So, is there a better way?
From 2011 I sat down and developed a robust investment process for managing money for our clients. The premise behind this is that I know stock markets will do what they do and I can’t control what might happen, but what I can do is with a careful process grow people’s wealth over time irrespective of what happens in markets. I also know that to do this I don’t have to take outlandish risks, I just need to follow a process. Sounds really simple and it is to some extent.
I spend most of my time studying the markets, meeting fund managers and monitoring the performance of the investments. We are looking for funds with managers that we would like to keep in our portfolios over a number of years. We don’t get distracted by short term bubbles. Each year we rebalance the portfolios; this is basically moving the proportions back in line with where it was the previous year. When we do this, we might change a fund or 2 but there has to be a good reason to do this.
When I thought about what I was doing with my own money, and what I was doing with our client money, I realised I was a gambler of my own money! This is when I asked for help from one of our financial planners, they were able to look at our goals and formulate a workable plan. More importantly they moved all our money into one of the portfolios I manage for clients. I no longer have any control over what I do with that money, I can’t suddenly decide to invest in the latest “hot stock”! This year has been extraordinary and so far after three years of stagnation my pension and ISA are up around 10%. I understand that if I get a slow a steady average 5% per annum that’s 50% return over 10 years; I also understand that it may mean I get 10% one year and it may go down 5% another but I am happy with that approach.
Am I a paid gambler of other people’s money?
Absolutely not; we have a process which ensures that we carefully monitor what we do and many themes that we work with are there for years. I don’t want to guess where the next hot stock or region is because although I might get it right one time I am almost certainly also going to get it wrong another. But it is more important than that.
Our clients are central to everything we do, and we want to work with them for their lives and hopefully with their children and grandchildren. Many have built up wealth over a number of years, or are building wealth. We want to help protect and grow that to enable them to achieve whatever goals they have. We have a duty to act responsibly and gambling is contra to that ethos.
In summary, I am looking to grow people’s wealth but I am doing this in a controlled manner, immune from all the short-term noise and so-called opportunities. Slow and steady growth is much better than trying to guess what the market will do today, tomorrow or the next day!
I would argue the danger of managing your own money is two-fold; firstly often it is done with little thought to what the long-term plans are and how they will be funded, and generally there is very little process put into the investment strategy which leaves you open to temptation and gambling! I am not saying it can’t be done but it requires significant commitment which many don’t fully appreciate.
Note: This is written in a personal capacity and reflects the view of the author. The post has been checked and approved to ensure that it is both accurate and not misleading. However, this is a blog and the reader should accept that by its very nature many of the points are subjective and opinions of the author. Individuals wishing to buy any product or service as a result of this blog must seek advice or carry out their own research before making any decision, the author will not be held liable for decisions made as a result of this blog (particularly where no advice has been sought). Investors should also note that past performance is not a guide to future performance and investments can fall as well as rise.