What has been will be forever….

A financial planner / wealth manager will be playing the long game, looking to deliver a “get rich slowly” strategy. It is a disciplined approach that is not exciting but should deliver strong steady long term returns.

History is littered with periods of exceptional performance. These often follow periods of market decline. The best time to invest is during the periods of decline because when the market corrects those investors will gain the greater benefit.

The reality is that most investors don’t, and as they start to see exceptional returns, they join the party, become complacent and believe “what has been will be forever….”

There expectations become unrealistic and all too often the illusion is shattered, they withdraw from investing until the cycle comes back and so it continues.

The good investors will know when to call the cycle (in reality there are very few can do this).

The art of managing of money

The role of a financial planner / wealth manager is to manage a client’s wealth to achieve their goals.

Goals will vary but essentially it will be to ‘protect’ and grow assets to provide for retirement, or to provide an income in retirement.

The art of managing of money in essence is very simple, and that is done by playing the long game.

Playing the long game

We know that “what has been will not be forever.”

Traders will try to profit from what the market will do today, tomorrow or next week.

They will get some right and a lot wrong.

It teaches us that it is very hard to play this game especially with assets which are there to deliver an individual’s goals.

A more realistic strategy is that of “get rich slowly” with a portfolio of assets which will deliver on goals over a 10, 20, 30 year plus period.

This is playing the long game, and is not always exciting!

Understanding portfolio construction

If all assets were in Japan in 2013 the return would have been 50% plus (if the right fund was selected).

This year the best returns might come from Europe or Asia or somewhere else.

This is not what portfolio construction is about because we cannot predict the unknown (i.e. which sector or region will do best).

Portfolio construction is about taking a long term view to ‘protect’ and grow assets across a spread of regions and sectors with a focus on the long term goal.

As an example 20% may be allocated to property, 30% to UK Equities, 20% to US, 20% to Europe and 10% to Japan. Individual assets are then allocated to each of those sectors.

The discipline comes in rebalancing each year (or in some cases sooner) as assets drift. Effectively selling the winners and buying the losers.  Over time investors will do well because there is no guessing which sectors will do best.

In essence it’s a slow, methodical process with a focus on long term results.

Apples vs carrots

There must be a comparative benchmark so investors can see if the manager is doing well.

The danger is that the comparison is like “Apples vs Carrots”.

If an individual invested all their money in Lloyds shares at 20p and then sold them at 85p they would have made 325% return. Over the same period investing in managed portfolios might deliver between 85 and 95% return.

Who is better?

I suspect the majority would say the Lloyds Investor and on a pure investment basis they would be right.

But in reality the two are not the same. Investing in a single asset is extremely risky compared to a spread of investments, although we can see how Lloyds have performed over the last few years there was no guarantee it would do this (and will continue to do this) and the focus is purely on the UK banking sector.

The truth is that you are comparing apples with carrots; the two are not the same.

We go back to the role of the wealth manager which is to “protect” and grow assets over the long term, it is not about trying to make short term bets. Perhaps a better comparison for a basket of active managers is to compare against passive funds.

Can you play the short game?

There is an argument that financial planners should manage all the client’s assets, certainly to be able to deliver what they want in retirement there is a strong case for this.

However, individuals do like to dabble in investments and therefore they should be able to play the short game but they shouldn’t assume it is the same. It could be that over a 10, 20 or 30 year plus period the returns are little different, but over the short term especially in periods of exceptional performance the returns are greater.

Conclusion

“What has been will not be forever”

A financial planner / wealth manager will be playing the long game, looking to deliver a “get rich slowly” strategy. It is a disciplined approach that is not exciting but should deliver strong steady long term returns.

The short game played by some will outperform especially in periods of market correction, but often in the long term does little better. Where it sometimes goes wrong is the belief that what has been will be forever…….

 

 

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. This is not a recommendation to buy any product or service including any share or fund mentioned. 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.

Please note...

Shininglights.co.uk is not regulated by the FCA. The information is purely a guide and it is the responsibility of the investor to carry out their own research before making any final decisions. We will ensure that the information is as accurate as possible but we cannot be held accountable for any errors or omissions. No products are sold on this site, nor do we endorse any particular product or investment.

Where there are links to third party sites this is not an endorsement of that site, and we cannot be held responsible for the accuracy of the information on that site.

Where there is reference to performance you should note that past performance is purely a guide and investments can fall as well as rise.

The information on the site belongs to shininglights.co.uk and cannot be replicated or copied without our permission.