Knowledge Centre - Resources
The ‘Alpha’ of Financial Advice
Financial markets volatility continues to create a huge amount of stress in our everyday lives – and the uncertainty brought about by rising interest rates has made it a challenging time to make important financial decisions, adding to existing stresses regarding the rising cost of living, job in-security, retirement planning woes and the health of our loved ones (to name but a few!).
If you are feeling overwhelmed with these concerns, you’re certainly not alone – but fear-not, there is a solution – finding a trustworthy financial adviser. However, it’s crucial to understand that seeking advice should not be solely focused on gaining higher investment returns (beware of anyone who guarantees this). The true value of financial advice lies in having a professional who guides you towards creating a personalised plan that addresses your specific financial situation.
Having such a plan can provide much-needed stability during turbulent times, when market fluctuations bring about unwanted anxiety and uncertainty. A good adviser will help you prepare for any challenges that may come your way and provide support through sound guidance and expertise.
This approach will equip you to navigate through market downturns, such as those that occurred in 2022. It will also position you to benefit from rapid market growth/recover, similar to what we saw immediately after the onset of the Covid-19 pandemic. The proposed strategy is designed for long-term investment success, allowing you to live your best life with the reassurance that your financial well-being is being expertly managed.
“When deciding on the allocation of your investment portfolio, consider the trade-off between the potential regret associated with a market downturn and the regret that may arise from missed opportunities when the market rebounds.“
As we journey through life, it is important to acknowledge that unexpected financial challenges will arise. It is wiser for us to be prepared for them rather than attempting to anticipate their occurrence. At present, we are faced with inflation, the possibility of a recession, tensions in Ukraine, and a rise in market volatility and more recently tensions between Israel and Hamas. We cannot confidently predict when these issues will subside or what may trigger the next crisis. The only certainty is that it will catch us off guard because if it were foreseeable, the market would have already accounted for it.
However, it must be noted that our plans may not apply universally. This is because everyone’s situation is unique, and their tolerance for risk varies. Our goals, brain function, and past experiences all play a role in determining how much risk we can withstand. For example, during a period of deflation, some people may feel more secure by keeping cash in a safety deposit box. However, this approach may not be practical or advisable in current times for growing one’s wealth. Ultimately, every person has their own distinct circumstances and preferences.
Real Financial Advice
How does the concept of ‘Alpha’ in financial advice aid in navigating the inevitable fluctuations of the market? Genuine financial guidance should address the fundamental question, ‘What are your investment objectives?’ A sound plan must have clear goals in place. For instance, if you have a 30-year retirement goal, you may be able to tolerate more risk for potential portfolio growth compared to retiring in three years.
It is essential to determine your desired balance between cash, bonds and stocks that align with your risk tolerance. While reducing stock investments can bring peace of mind during market declines, it is crucial to consider the impact on potential gains during market upswings.
Truly valuable financial advice focuses on managing the aspects within our control, such as increasing savings and decreasing expenditure.
‘Alpha’ of Advice Quantified
Below is an excellent chart that illustrates how advice can add value to an investor’s returns. The average investor (fourth from the right) has achieved 3.6% in 20-year annualized returns, nearly investing in anything for the past 20 years could have beaten that.
Not surprisingly, nearly all investors would have been better off holding a 60/40 portfolio (60% equities / 40% bonds) and doing nothing, this is the value of advice – which is behavioral coaching. Investments do their job over the long term, likewise with tax advice, the value of calming/comforting a client down every 6-12 months through the advice process will ensure that they stay invested and add to overall long-term returns.
In this case, the value is quantified at 7.4% – 3.6% = 3.80% annual return of Advisers Value!
Source: JPMorgan Asset Management
The value of advice is as subjective and unique as each of us. For some of us, it’s the security of having a more professional relationship, while for others it’s for reasons such as tax benefits or ease / convenience of use.
The biggest benefit of hiring an experienced advisor is that they provide a well-thought-out investment plan that everyone seeks for “temporary safety” during times of market distress or euphoria. This is when you are tempted to give up. From strategies tailored to your individual goals to the peace of mind that comes with a comprehensive financial plan, the benefits of having an advisor are invaluable.
Traveling together not only protects you from pitfalls, but also allows you to make informed decisions and promotes a sense of financial well-being. As you navigate the complexities of personal finance, the support and guidance of a trusted advisor will guide you and create a brighter future for you and your loved ones.
Preserving Your Wealth for the Long Term: A British Expat’s Strategy in Singapore – Part 3/3
After establishing a financial base and growing your wealth, the next critical phase for British expats in Singapore
Growing Your Wealth in Singapore: A British Expat’s Guide – Part 2/3
Building upon a stable financial foundation, the next stride for a British expat in Singapore is to grow