BackStopping investors from taking emotional decisions
Markets will keep going up or down, but a focused investor will stick to her goals
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It was September 2013 when a couple invited me to meet them and ‘informally’ advise them on their financial affairs. They came to know of me through a reference from a person who had been my client for the past two years. They were high net worth individuals (HNIs) and had a successful business.
During the meeting, I could sense that they were not keen to discuss their portfolio in much detail. They just wanted my ‘expert’ views on how to navigate the markets, as both equity and debt markets were in turmoil and the Indian currency had almost touched 70 against the dollar—everything was looking gloomy. I asked them how they make financial decisions, and they said they conveniently go by the 5-star rating of mutual funds in newspapers or TV channels and invest accordingly. Surprisingly, they invested in stocks using the same modus operandi.
The couple did not have a professional investment adviser to guide them and nor did they seem inclined to hire one. All I could advise them on was that both equity and debt markets looked attractive from a long-term view and it is the time to stay invested or put in more money if they had surplus. The meeting lasted for around 45 minutes, with a cup of coffee served to me to compensate for my time.
Come December 2014, and the same couple wrote to me desperately wanting to meet to discuss their portfolio. When I met them, I found that during the debt market mayhem, they had become very nervous and had pulled out all their money from fixed income funds, at a loss, and then parked it in fixed deposits (despite being in the highest tax bracket). Their equity shares portfolio was still reeling under losses despite the huge run-up in the recent past.
This time, too, they wanted my expert opinion on near-term outlook, to which I clearly told them that I was not an astrologer, but a financial adviser. And that my job was to advise investors on meeting their financial goals and not predict daily market movements.
I meet many such investors on a regular basis, who expect financial advisers to predict the market outcome perfectly, to advise them on the “best" performing mutual funds, and so on. They want their financial advisers to “actively" manage the portfolio so that they can get optimal returns.
Since the election results, many investors have been wanting to invest money in equity funds but have been waiting for a correction. This reminds me of a powerful quote from one of the greatest fund managers of our time, Peter Lynch, who said, “Far more money has been lost by investors preparing for corrections or trying to anticipate corrections than has been lost in corrections themselves."
The most difficult investors to deal with are the ones who possess half-baked knowledge and understanding about personal finance. They want to make you believe that they know a great deal about personal finance by throwing all kind of technical jargon at you to look knowledgable. It’s very difficult to manage this type of an investor. One such investor had asked me whether he should continue investing in an equity fund, which was managed by one of the best fund managers in India. He had been holding this fund for three years, and in the last one year, the fund had underperformed the benchmark. That had got him a little concerned. I asked him to stay put, since this was for a very long-term investment horizon. But he was not convinced and went ahead and switched to the then current winner. Within a year, his earlier fund bounced back sharply, performing much better than the switched fund.
The primary role of the adviser is to stop investors from taking emotional decisions. Most investors suffer from various human biases, which Carl Richards, an American certified financial planner, puts as “behaviour gap" in his famous sketches on paper napkins. A good adviser acts as a wall between the investor and her committing financial mistakes. The adviser acts as the navigator and helps the investor ride through the various market movements. Often, the advice may simply be to do nothing, just remain calm and have patience.
Markets will keep going up or down, but a focused investor will stick to her goals. The role of an adviser is to keep reinforcing this belief in the investor from time to time, so that she does not commit grave mistakes.
According to The Investment Funds Institute of Canada’s Value of Advice Report 2012, an investor who follows ab adviser’s directions is likely to do 2.7 times better than an investor who is managing her portfolio by herself.
Gajendra Kothari is managing director and chief executive officer, Etica Wealth Management Pvt. Ltd.
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