During market downturns, investors are commonly advised to stick with their strategic asset allocation rather than crystalise their losses in the hope that the downturn will be short lived and that returns will revert to historical norms.
During market downturns, investors are commonly advised to stick with their strategic asset allocation rather than crystalise their losses in the hope that the downturn will be short lived and that returns will revert to historical norms.
The purpose of any advice business is to help its clients to achieve what they want to achieve. So, why is talking about goals-based advice seen as being 'different' from what financial planners have always done?
Sequencing risk is one of the most important things to consider when constructing your investment portfolio.
In short, advisers are more likely to succeed in meeting their client’s financial needs by adopting a Goals Based Investment (GBI) approach that encompasses dynamic asset allocation, than by following the traditional risk-based strategic asset allocation methodology that has been common practice over the previous few decades.
The premise of Goals Based Investing is to focus each investment portfolio on specific individual personal and lifestyle goals. Those goals inform the right timeframe, risk and return parameters, which in turn determine the best asset allocation and investment mix. Goals can be short-term, such as taking a holiday, medium-term, such as renovating or paying school fees, and long-term, such as saving for retirement.
Let us examine what happens when the clear and present danger from the coronavirus meets the global asset bubble, your portfolio and the industry standard investment approach. This is no small issue because – contrary to a market consensus – the coronavirus (COVID-19) is actually a real threat to complacent equity markets and client portfolios. It is a global health pandemic which requires active management in the real world, and which should also be risk managed by your adviser or super fund. The coronavirus and its real-world management should not simply be dismissed as just another flu, and could even be the catalyst which bursts the global asset bubble.
When we think of investment advice, the first question almost always asked is “what’s the client’s risk profile”? Like Pavlov’s Dog, it’s almost a conditioned reflex to the way the industry has operated over so many years. Of course, it’s important to understand what type of investments the client would be ‘comfortable’ with, but does it really help them achieve their goals and is it really in their best interests to invest according to a risk profile questionnaire?
New consumer-centric financial product and distribution obligations from April 2021 offer astute financial advisers an opportunity to not only meet the requirements, but to gain an edge in achieving superior client outcomes and improve their business practices.
Most strategies in the market are too ‘cookie cutter’ and are not resilient enough to survive a downturn or an end of an investment cycle. What’s more, these strategies do not seem to adequately compensate the investor for the actual risk being taken. Are we really doing our best interest duty with the investment strategies that we are dispensing?
Looking at the current state of things, we have observed three investment ‘wrongs’ many financial planners are guilty of:
Many portfolios traditionally use government bonds and cash to be defensive. With bond rates and cash rates now at historic lows, there is no longer much yield or return that one can expect from a long-term investment in these. Furthermore, the likelihood of losing money over time in real terms is now higher, given it now requires little inflation to overcome the mediocre expected return from historically low yields. Unfortunately, such a situation reflects lacklustre economies and is the end result of market returns being pulled forward by government intervention. Traditional defensive investments have simply become a tool of government policy as governments attempt to prolong an ‘artificial’ economic expansion.
