Choosing how to invest our hard-earned money can be a minefield! There are so many options out there, and everyone we speak to seems to be an expert. Most people will follow the advice of their financial planner, which should make sense. However, this does not always lead to the best outcomes.
The truth is that how we invest should be driven by our personalised financial plan, which should be clear and simple to stick to once established. Here are 2 red flags that investors should look out for.
1. You don’t have a personal financial plan.
If your adviser has not built a personal financial plan with you that gets revisited annually and updated as your life changes, then beware. Who builds a house without plans? Further, who travels without a plan? Financial planning is a VERB, not something that gets done once. What’s more, it should also be about YOU and not be focused on your money.
2. The market expert.
Unfortunately, many financial advisers see themselves as investment experts despite not having the qualifications. Often, they erode more value than they add to a client’s investment portfolio by trying to show that they can pick funds and time the market.
The financial advice industry talks about the “behaviour gap”. This is the difference between the return that the market delivers and what the average investor actually gets. The difference is put down to investors chopping and changing their investment portfolios, and the implied solution is working with an adviser to close this gap.
I have always wondered about the accuracy of this assumption, so after a recent investment talk, I asked a fund manager about it. So, she shared that they were in the middle of a study on this, and her response to the interim results confirmed my suspicion. She shared that those clients who dealt directly with them lagged the market by 2% p.a. while clients who worked through advisers lagged 6%!
If meetings with your adviser consist of talking about the markets and if they advise to change your funds on a regular basis, then chances are you are not getting market-related returns.
Your investing philosophy should be quite simple: buy the great companies of the world (the stock market) and let them grow your wealth over time. Further, your adviser should be focused on you and your family, helping you control the things you can and living the best life you can with what you have.
Dirk Groeneveld, Certified Financial Planner.
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