This morning I have listed to a podcast from FundAdvice.com providing their response to the current crisis - Coping with the Wall Street Crisis. The podcast is 30 minutes in length and 15Mb in download size in case you wanted to listen to it yourself.
Some of the topics were not totally relevant to the Australian context but I wanted to pull out a few points that were.
These events are not unprecedented
Paul Merriman pointed out that we need to put the current situation into perspective:
- Remember the high interest rates of the early 80s
- Between 2000-2002 the US market was down twice as much as it is now
- In the 70s the US market dropped over 50% in response to the oil embargo problems
This is not to say that this is not a very serious situation but it is a situation we have to go through. This point goes back to the whole question of risk and return. Returns from share markets over time are greater than returns from cash and fixed interest securities because they are riskier investments. As a trade-off for that risk, investors expect to be rewarded. If they were not riskier and experience volatility in prices, returns should be more consistent to returns for other investments like cash deposits.
Emotions are your worst enemy
Your emotions can lead to making unwise financial decisions. A quote from Paul Merriman:
"Your emotions are absolutely your worst enemy when it comes to dealing with money. People get way too excited when times are good. People get far too frightened when they are bad. In both cases, you will react irrationally based on some really bad information that is coming from within you. And the media is making money by driving those fears right now."
Be careful listening and watching the news media
The news media despise putting the current situation into perspective, they want to sensationalise the issue by using terms such as worst, or worse than to get attention to their story and by doing so sell more advertisements or subscriptions.
Importance of Asset Allocation based on scientific research
Mark Metcalfe, a financial advisor from Merriman, Berkmann & Next - the firm behind FundAdvice.com, suggested that he is just as convinced of the benefit of asset allocation & diversification which is underpinned by peer reviewed white papers - academic research - which is based on long run historical investment data.
What to do now?
The key is have a disciplined approach and stick to it. This means doing nothing or even adding more growth assets to your portfolio but definitely not make wholesale changes.
Paul Merriman also suggested that investors should understand where they are now and what their portfolio needs to provide for their future. A financial advisor should be working with clients to do this and help make sure portfolios have built in an appropriate amount of risk for each client.
Don't pretend to know which way the market will go
One presenter paraphrased a quote from William Bernstein, the author of the Intelligent Asset Allocator. There are three basic groups:
- Those who don't know which way the market is going
- Those who know they don't know which way the market is going
- Those who know they don't know which way the market is going but pretend to know to justify their livelihood
Characteristics of Good Advisors
- offer an initial fee consultation,
- prepare people for the bad times
- advisors work together to service clients
- have an approach to investment based on the fundamentals of asset allocation based on academic research
- they don't pretend to know which way the market will go
- are a fee only advisory service, fees are separate from products
- they are available
- they have back up support
- advisors share their opinions on a client's situation with another advisor
- provide the right direction and give clients the best service
Some food for thought in what is a difficult time on investment markets.
Regards,
Scott Keefer
