by Bruce Nash

Here is what I have learned in my 23 years working as a financial planner:

  1. The old adage of ‘it’s time in the markets, and not trying to time markets’ is genuinely true. It is faith, patience, and discipline that are the key ingredients and drivers to good financial well-being. By this I mean being diligent with your contributions, planning for contingencies and staying focused on your long-term goals, but reviewing these on occasion as your circumstances change.
  2. The academic investment model ultimately remains the most effective way, in my opinion, to deliver the best long-term client experience and investment outcome.

    There is ever increasing and overwhelming evidence to support this. However, many are still invested through an ‘active fund management’ regime, which is an historic and almost always inferior approach. The academic model utilises indexing funds or non-predictive tracker funds to capture the markets returns efficiently at low cost, through a highly diversified portfolio of holdings and asset class selection.

    Over and above this, the application of more advanced academia, such as we use, can capture performance enhances by using various “factors” such as small cap, value, and momentum. We are continually looking to seek to improve our approach as our research and learnings evolve.

  3. While most will focus on ‘charges and performance’ these represent only a fraction of the wealth creation picture. Of much more importance is your holistic planning, being tax clever, having discipline with contributions and, above all, understanding the impact of the emotional biases that we all have in our decision making.

    This latter point is one of the key ingredients to financial success, but one of the most difficult to manage and control. Human beings are ultimately driven by their emotions and have automatic thinking, which is a function of our evolutionary development. It can be very unhelpful for long term financial planning.

    For this reason it makes a lot of sense to engage to help of a trusted financial planning partner. They can help you make decisions at arm’s length, dispassionately, and provide context and a logical fact-based input to the decision-making process. There are several other key ingredients to good financial wellbeing, among which are taking responsibility for your finances, spending time each month on them, being frugal when needed, and practising social indifference.

  4. Turbulent market periods, such as those we’ve recently endured, are a regular part of the investment journey. We have seen nine negative market cycles in global equities since 1972. Since 1929, negative market cycles have lasted between three months and five years in duration, but on average have been 21 months. Severe market downturns are often followed by strong market recoveries, so disinvesting when markets have gone down can be particularly destructive.

    For example, 12 of the best trading days occurred in years with negative returns, and six of the 20 worst trading days occurred in years with positive returns. For those that choose to disinvest or hold cash for a prolonged period, it is even more damaging.

    A recent report by Vanguard stated that if you remained in cash for six months, you have a 72% probability of underperforming a ‘middle of the road’ 60/40 equity/bond portfolio by 5.5% on average, and for 12 months, a 79% probability of underperforming by 9.1%.