We trade too often, at the wrong times and in the wrong instruments. Our inflated expectations make matters worse still, because, we the investors, expect outperformance as the fundamental right. This mindset has been building up since time immemorial, and it's these investment managers that have planted such a mindset, implicitly and explicitly. That's what makes the sale, says one financial advisor.
Much of the financial advice is glorified (or sometimes not-so-glorified) stock trading or some other form of market timing. In my experience, most advisors and their clients wrongly assume that the advisor's primary function is to pick promising investment vehicles. While investment management is important, it can never be effective without other areas of personal finance like personal cash flow optimisation, goals, risk tolerance and asset allocation.
Here are few things an investor need to understand while doing their investment for a particular financial goal.
Regular and increased savings
How regularly one saves and the savings rate is far more important than the rate of return in determining how bright the future is likely to be. Good planning will put your financial house in order by creating a consistent savings plan and translate that into a well thought-out asset allocation strategy. Unfortunately, we tend to spend a lot of time trying to predict market movements or timing our investments rather than thinking about ways to save more. This is where the advisor can help in setting the right priorities.
Out of our general fear and pervasive market tips, even if we invest, we often don't stay invested. We admire the Jhujhunwalas and the Buffets for portfolio management but we hardly practice the unwavering discipline that they can observe for an extended period of times with their investments. If we display the ability to keep our composure during difficult markets, we will surely be rewarded for it. Overtrading is one of the biggest reasons for sub-par portfolio performance. Although an investment cliché, building wealth is not about 'timing' the market but rather 'time in' the market.
Financial planning & cash flow balancing
The underlying reason for successful financial outcomes is financial planning. Yet it is often miscommunicated as tax planning or insurance planning or choosing investments. Financial planning is much broader. It involves budgeting, goals, appropriate insurance, planning for lifestyle, retirement and legacy, risk management, asset location, retirement planning, tax efficiency, tax planning and more. But, investors find it difficult to articulate their financial future apart from the regular ones like retirement or kid's education. It's the job of the planner to help clients in this process.
Managing expectations and behaviour
All of us are prone to behavioral and cognitive biases that hamper our progress. And what adds to the challenge is that everyone tends to believe that they, specifically, are not susceptible to them. Biases like considering investments in isolation and destructive overconfidence in one's ability are very common. Then, there is the favorite loss aversion, wherein a portfolio contains many bad investments in the name of diversification. These habits need a broader perspective that emphasizes these realities.
Many research studies conclude that asset allocation strategy is more important that the individual investments that it comprises and further that it is uncomplicated to observe. Regular planning exercise ensures that asset allocation is matching one's portfolio with cash flow needs, and risk parameters, all of which tend to change with time.
Managing costs and fees
A good advisor helps in counting and regulating the cost of portfolio management and transactions.
A smart person will look for what can offer the highest likelihood of meeting their needs, goals, and desires. It requires far more than selecting investments. It requires substantial expertise and the ability to manage emotions and expectations.