I have lost count of the number of times a client has asked me what return they can expect from an investment or told me that they demand a certain percentage of ‘guaranteed’ annual return. I always answer exactly the same way: I have saved my clients several percent every year. I will not make vague promises of ‘X%’ return regardless of market conditions. That is, quite simply, not my job!
The role of a financial advisor is often misunderstood. We are not the all-seeing oracles, predicting the future of global economics and finding the rare diamonds lurking at the bottom of the murky swamp that is the global investment market.
The best financial advisors will, of course, be able to recommend sectors, investments, fund managers and portfolios that will give their clients the best possible opportunity to make a return above the market, and I am very pleased that our advice has led to such gains for our clients. However, the primary concern of good advice should always be to protect what is there before trying to make it grow.
Consider a professional athlete in training for a major competition. If they want to improve their time then they can go to the track each morning and run their hardest to shave off that fraction of a second. Keep pushing harder and harder in order to improve their performance. They could give 100% in every single practice race, yet we know that most professional runners record their personal best times in major competitive races. There must be a reason for this.
The fact is, an athlete trains for preparation and for protection. The sprinter who runs flat out every day runs the risk of injury before the big race. The one who does not condition their body correctly for the event runs the risk of falling behind their competition or, worse still, being hurt when the time comes to finally push for that finish line. So how do we know when to go flat out with a portfolio and when to jog along at a steady pace? It all comes down to how much you are prepared to lose. Can you face collapsing by the side of the track if you push too hard? If not, don’t push so hard today.
Without exception, I have found that those clients who chase the highest returns from their overall portfolio are those who can least afford to lose it all. So how is it that the super-rich seem to make more from their investments than the average saver? It’s a matter of proportion. Someone with a hundred million to invest might choose to gamble a million on an outlandish and far-fetched proposition that could make a spectacular return or collapse into dust. For one percent of their portfolio, why not? I can guarantee that person would not throw the majority of their savings into such an endeavour. It is this kind of speculation that makes headlines.
“Billionaire Joe Bloggs makes 432% in three weeks with surprise purchase of ABC ltd.”
“X Group Head of Investment loses $30 million in a week after collapse of XYZ inc.”
If I choose to invest a few thousand in venture capital and lose all my money, nobody from the Wall Street Journal will be leaving messages on my voicemail asking for comment. Even if I turn a great profit and end up with a couple of hundred thousand, I would scarcely make the business pages of the local paper. So what of these clients that demand 8, 10, 15% per year on their portfolio based on what they have seen on CNBC or read in Forbes? I honestly believe that they have not considered the reality of losses.
To examine this reality, let me first give you a bleak truth. There is no such thing as ‘absolutely guaranteed.’ The word itself refers to a promise. A ‘garant’ was an old European word for a warrant, written promise or deed. The garant was made by a ‘guarantor’ to a ‘guarantee’ as a form of pledge. Therefore, any guarantee is only as good as the guarantor that issues it. Cast your mind back ten years or so and recall how the guaranteed 7% per annum interest on deposits in Cypriot banks quickly turned into 20% losses when conditions soured. 15% guaranteed returns from Icelandic banks led to whole accounts being vapourised in the financial crisis.
If nothing is certain, you may well ask how I propose you protect your assets in the first place. On the one hand, I am saying that we should protect what we have before chasing returns.
On the other hand, I am telling you that nowhere is safe and there is always a risk, whether due to inflation, institution or the market. I break this answer into two parts: Cost-cutting and risk limitation.
Cost-cutting is the simplest form of financial management. The old adage states that a penny saved is a penny earned. This is never more true than if you did not realise that you could save that penny. I am always amazed at how much money people can lose or waste without even noticing. I’m not even referring to buying premium brands rather than budget equivalents. That is a matter of choice. Simple things like using online banking for foreign exchange, not paying off credit cards in full when there is enough cash in the current account, choosing not to renegotiate a mortgage or even paying a monthly bill rather than annual can add needless extra costs that are slowing down your growth and harming your plans for the future.
Risk limitation is just a case of finding how much volatility you are comfortable withstanding and doing everything possible to keep within those bounds, regardless of what may happen around you. We can seek the strongest, most creditworthy institutions in the most protected jurisdictions but without diversification, that accident is still waiting to happen. Think to yourself first what you are prepared to risk and adjust your expectation of gain accordingly.
Ask someone else to look at your costs. Ask a professional to see if there is anything you can do more efficiently. Seek out those tax-free ‘pennies saved’ that you never knew you had. Then, once you have maximised what you already have, take some good advice on how to protect it and reduce your exposure to future mishaps. Then – and only then – start asking about returns on investment.
We all know that the tortoise eventually beat the hare eventually by taking it slow and not over-exerting but bear in mind he also carried a shell, just in case.