The value of advice

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BUSINESS NEWS - A few months ago, we placed an article called “Balancing offence and defence to build all-weather portfolios”.

It seemed like an important message at the time, because investors had recently faced Covid-19, civil unrest, natural disasters, geopolitical uncertainty, and war! If ever, it was a good time to ensure your investment portfolio was well balanced.

So, what has changed? It seems our concerns have grown, and that volatility and uncertainty are here to stay – for a while yet.

It is no surprise then that the value of advice is very topical at the moment. At the recent Investment Forum hosted by The Collaborative Exchange, Nedgroup Investments presented a very interesting presentation on exactly that – the value of advice.

Whilst financial advice can, and should, be kept simple, this does not necessarily mean it is easy. The reason for this, Nedgroup says, is that money is always an emotive issue. This is where good financial advice shows its value.

A good financial adviser needs to play a number of roles, including coach, teacher, implementor and psychologist in order to meet 9-point check list clients need to achieve financial freedom.

Write down your goals
A good coach will always tell you to write down your goals. Tiger Woods’ coach famously said: “If you aim at nothing, you are sure to hit it every time.”

Spend less than you earn and start investing
Sometimes a coach needs to repeat the seemingly obvious. The easiest way to start investing is to budget for it.

Inflation is your biggest enemy
A good financial adviser needs to teach their clients about basic financial principles. Inflation is, in effect, compounding in reverse. A retired investor whose income grows slower than inflation finds it uncomfortable over five years but devastating over twenty years.

Compounding is your biggest friend
Albert Einstein is reported to have said: “Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn’t, pays it.”

Invest a high percentage in high quality growth assets
By investing in equities, Nedgroup says you become part-owner in some of the best businesses in the world. What does this mean over a long period of time? If you had invested R1 000 in 1925, your investment would need to be worth R210 012 just to keep up with inflation! Where you put your money will have had a dramatic effect on its value today.

SA Cash	R436 979
US Cash	R1 052 306
SA Bonds	R1 290 939
Global Bonds	R2 366 054
Global Equity	R121 394 560!
SA Equity	R218 781 290!!

Source: Nedgroup Investments (period 1925-2022)

Diversify across companies, sectors, countries, managers
The most elaborative plans mean nothing without implementation, and it is here that diversification is so important. The South African equity market represents about 0.5% of global stock market. It makes no sense to have your entire portfolio invested in such a small universe.

Be very aware of fees
Be prepared to pay for good advice, but no advice is worth being overcharged for.

Stick to your plan
It is often necessary for advisers to play the role of psychologist, particularly in times of increased volatility. With volatility comes noise, and with noise come fear and uncertainty. It is the adviser’s role to filter out the noise and protect clients from making bad decisions.

Keep it simple
A simple plan is easier to stick to than an elaborate one. If you can achieve the following you have been successful:

“The highest form of wealth is the ability to wake up every morning and say: I can do whatever I want today”. - Morgan Housel