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Investment strategies – planning beyond the money

Do you think that two clients should have the same investment strategy if they have the same financial position, identical needs and an indistinguishable risk appetite?  Think about this for a while, and I’ll come back to it at the end.

If you spend a few of minutes on the internet you’ll find a number of investment strategies.  Some are obvious, others technical and then there are those that feel like the flavour of the month.  But when you look at the substance of these strategies, you can see that they are nothing more than the plan for an investor to achieve their goals.

So once you’ve determined your client’s goals, all you need to do is set up a diversified portfolio that is most likely to achieve the required returns with the lowest risk.  Simple.  End of article.  Well it would be if you clients were rational and emotionless robots.  But they are neither because they are human, and humans have biases and emotions that can derail the best investment strategy.  The implication is that an effective investment strategy has to include a plan for the money and a plan for the person.

Humans are highly competitive and we love doing fun things.  Which is why we do things like playing the lottery and gambling that are almost guaranteed to make us lose money despite having the appearance of giving us the opportunity to make money.  Some people who do this don’t understand how significantly the odds are stacked against them (the lottery has been called a tax on people who can’t do maths), while others understand the odds but continue anyway because of their personality.  The same logic applies when it comes to wealth creation, which means that you need to understand your client’s personality so that you can identify their specific investment derailers and build this into the plan to manage the person.

There are a number of potential investment derailers, but one of the biggest is that clients don’t grasp the difference between investing and speculating.  Investing is defined as “putting money into financial schemes, shares, property, or a commercial venture with the expectation of achieving a profit”, while speculating is “investing in stocks, property, or other ventures in the hope of gain”.  At first glance they seem to be the same thing, but if you look at the definitions again, you’ll see that investing has an expected profit, while speculating has a hope of profit.  If your clients don’t understand the difference, they are going to constantly ask why you haven’t put money into ABC company or whether we shouldn’t be selling because the market has dipped.

To move from speculating to investing means you need to move from a hope of profit to an expectation of profit.  This requires you to put your clients money into something that is very likely to deliver the required return.  Fortunately, there are any number of well managed funds and portfolios that target a specific return (usually expressed as inflation plus X%).

Again, this seems straightforward.  And again, the challenge is that you’re dealing with people.  Firstly, long term investing should be boring, which means that you need to find something other than performance to talk to your clients about.  Secondly, it means that certain clients will need to get their financial fun and excitement somewhere else.  If you have one of those clients you may consider allocating a small portion of the portfolio into things like a share trading account, crypto currencies or cannabis futures, so long as your client understands that this portion is speculative while their real money remains invested.

In summary, an investment strategy is nothing more than the plan for an investor to achieve their goals.  While this plan must include various technical matters to manage the money, it must also include a plan to manage the person to stop them from derailing themselves by doing things such as “investing” large amounts in assets that offer a hope of profit.

If we return to my original question, do you still think that two clients should have the same investment strategy if they have the same financial position, identical needs and an indistinguishable risk appetite?

Guy Holwill is the Chief Executive of Fairbairn Consult.  He is a qualified Civil Engineer and Chartered Accountant and has worked in financial services for more than two decades.  Guy is passionate about business models that thrive in the changing worlds of regulation and customer experience.

Fairbairn Consult is a firm of Registered Financial Advisers. We are a licensed FSP and a member of the Old Mutual Group.