What does your financial adviser do for you? According to Daniel Kahneman Nobel prize winner and author of “Thinking, Fast and Slow”, financial advisers are responsible for:
“The anticipation, diagnosis, and the management of client discomfort and regret.” Kahneman & Riepe, 1998.
For my job description I prefer the analogy of a zoo-keeper in charge of feeding the tigers. You know the tigers have to eat i.e. appropriate risk budgets to provide for long-term income and growth objectives, however if you unlucky you end up becoming the food.
Benjamin Graham father of value investing referred to the stock market as voting machine in the short-term and the weighing machine over the long-term. Short-term market moves are driven by sentiment and not rational thought or value. In Daniels book he refers to this as “thinking fast” not slow and smart.
Unfortunately, investors are prone to the bias error of desiring immediate returns. We are not patient long-term investors. The theory of value investing is buying shares at a price below the underlying intrinsic value, which sounds simple, yet is so difficult to do, because we have this short-term mindset and we feel the pain of loss twice as much as we experience the pleasure from gains.
Sticking to my analogy; as a “zoo keeper” responsible for ensuring the tigers stay alive you have to feed the tigers even when they are behaving badly (appropriate risk budget), which is when you are most likely to be eaten.
Personal risk profiling questionnaires determine an investors emotional risk tolerance level, which may be totally different to the required risk budget to achieve the objectives. Any adviser worth his / her “salt in the soup” will recommend an appropriate risk budget notwithstanding a lower personal risk tolerance level and the obvious risk of being eaten alive.
In reference to Daniel’s adviser responsibilities; investing is uncomfortable and full of emotional influences of fear and regret. This is why finding an adviser you trust implicitly who will be able to anticipate, diagnose and manage the discomfort and regret is the key to achieving your long-term objectives. When you find him or her try not to eat them it’s bound to cause indigestion.
Mcomm, CFP®, HdipTax
T. 021-851 3746