August 2020
What a time to be alive.
The US market is up year-to-date, investors are falling in love with gold again (this madness usually hits us once a decade), and the young-ens are speculating on Tesla stock via free trading apps. People can do everything themselves, no help needed, even blow themselves up financially, but at least they save fees in the process, 100% of nothing is......
💰 Investing Cash During a Temporary Decline
If there was one investment principle that coursed through the veins of the seasoned Financial Adviser it would be the principle that you ‘cannot time the investment markets’. Yes, you could get it right once, but your luck is sure to run out. Long term, it’s a sure-fire way to achieve sub-optimal returns. If anyone claims to be able to time the markets correctly and consistently with foresight, run for the door.
So what do we do about declining markets if we can't time them?
The financial literate sees a decline in the stock market (the great businesses of the world) as an opportune time to invest any excess cash. Why? One of the most mature investing concepts to master is this:
A declining-in-price market is a rising-in-value market. Inversely, a rising-in-price market is a declining-in-value market.
Successful investing is about principles and strategies, not impulses and wishes.
An Example
The stock market has temporarily declined by -20% (or more) and you now wish to invest excess cash. At this stage clients fall into two camps:
I have excess cash but I’m nervous that the market will decline further and I'll invest at the wrong time.
I have excess cash but I’m nervous that the market will advance further and I want to get my money to work as soon as possible.
Successful investors think in multi-decades, failed speculators think in multi-weeks. Investing cash during a volatile market heightens the key investing emotions, these being fear and greed. So now we approach the subject of how do we invest this cash. We’ll take each option or strategy in turn.
1: By Nightfall
If I had the money I’d invest 100% of it by nightfall. This is the correct financial answer as we can’t time markets and they generally rise 75% of the time and decline 25% of the time. These are decent odds, you don’t need a degree in statistics to work that one out.
2: We drip feed
This is where a pre-agreed strategy is needed. This is not the correct thing to do financially but emotionally may feel better for your client. So the idea here is to agree the strategy at outset. Remember we can’t time markets consistently, so being open to the whims of the market it’s foolhardy.
An example of investing your client's excess cash could be:
25% slice invested day 1
25% additional slice invested day 30
25% additional slice invested day 60
25% additional slice invested day 90
You need to agree on the % amount and the specific day. This is a strategy and a plan, the foundations for successful investing. Deviating from the strategy based on the market's movements is a recipe for disaster. Any deviation to the plan will be market timing.
Another example of investing excess cash could be:
30% invested day 1
20% invested day 60
20% invested day 120
30% invested day 180
There’s no exact science to ‘drip-feeding’ cash, even though I'm sure there are many 65+ page reports that claim to have found an 'optimal' solution (hindsight looking), the important thing is to have a strategy and stick to it.
3: ‘I want to wait and see’
When these words are uttered the professional adviser shudders. From my experience, when a client says ‘I want to wait and see’ it means one thing "I want to wait and see the market rise then get it", this results in buying high. The Unicorn Investor says they’ll wait for the market to decline further before investing. I've yet to see this be done successfully in my career. I look forward to the day. When someone who is already fearful sees a further decline, that fear is only amplified. No fearful client on planet Earth has ever 'waited to see' where the market was going, seen it decline in price (which is a rise in value) and then pulled the trigger and invested.
🏆 Main Feature
22 Behavioural Nudges [7 minutes].
Behavioural Finance can at times be too theoretical, with little practical guidance on how to implement its learnings to create better client outcomes. This article by Dr Daniel Crosby (one of the speakers at HUM South Africa) is a great list to keep on your desk.
📰 Articles & Blogs
A Simple Way to Vastly Improve Your Investment Performance [2 minutes]. A pre-mortem on what you'll want to do wrong.
Cash panickers: Coronavirus market volatility [6 minutes]. The wrong thing for the wrong reason at the wrong time.
Top Advisor Marketing: Why Do Great Advisors Fail To Get New Business? [3 minutes]. Do you have a clear strategy?
The performance of active management during the COVID crisis [5 minutes]. Is this the greatest myth in finance?
How to draw the line when clients challenge your approach [3 minutes]. Master these difficult conversations.
How Will Your Client Experience Need to Evolve? [3 minutes]. The new world demands a new experience.
Learning your lines [2 minutes]. How do you describe what you do?
As Old as the Hills [6 minutes]. Human nature remains constant.
The Tech Lie You Don't Want To Fall For [5 minutes]. Technology isn't always the answer.
How Client Meeting Surges Boost Advisor Productivity [19 minutes]. Batching to free up your time.
Are your clients talking about how great you are? [7 minutes]. Are you spending too much time talking about investments?
🎧 Podcasts
Getting Better Clients [43 minutes]. It's as much about you choosing them than them choosing you.
Finance in the Time of Coronavirus [41 minutes]. Communication is the key.
Gold Bugs - Is It Time To Invest? [24 minutes]. Andy presents a solo show in which he discusses our strange obsession with gold.
📚 Book Recommendations
The Psychology of Money: Timeless lessons on wealth, greed, and happiness by Morgan Housel.
This book is now available for pre-order. It will no doubt be a must-read from the best financial writer of our time.
I'll be listening to this on Audible on the day it is released.
