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How good advisers get investors to look to the horizon

22 January 2018

Damian Ornani, chief executive of Fisher Investments, reflects on the Bitcoin phenomenon and the value of financial advice.

By Damian Ornani,

Fisher Investments

One of last year’s biggest financial news stories – if not its very biggest – was the upward surge of cryptocurrencies like Bitcoin.

It’s not hard to see why: even after a -34 per cent bear market in the year’s final two weeks, Bitcoin rose 1,369 per cent in 2017. The media was filled with discussions: some optimistic about what it meant, others merely celebrating the glittering returns.

On one hand, it is interesting – and entertaining – to see what euphoria looks like from afar. But it also highlights a key risk we are likely to increasingly encounter as the global stock market keeps climbing: investors, punch-drunk on past returns, get greedy and chase heat – ditching diverse investment strategies designed to meet their personal goals for the speculation du jour. Now, before Bitcoin-like euphoria hits the equity markets, is the time to pre-empt this behaviour.

In my 20-plus years in the money management industry, I have learned investors can be much more irrational than you think – until you experience it first-hand. In 2000, no one could have enough US tech stocks, to the point investors snapped up IPOs of unprofitable firms with “dotcom” in the name.

Never mind the lack of business plan or that many of these firms basically relied on access to capital markets to stay afloat – burning through cash seemed to be their core business. Sloppy was attractive in those heady days.

In 2009, it was the reverse: a common sentiment at the depths of the financial crisis was that even great businesses were actually slop; selling everything was the only course. Taking either move –  or, worse, both – did vast damage to investors’ ability to finance their long-term needs and goals.

As we sit here now, coolheaded and calm, it is easy to see those as extreme examples and presume you or your clients won’t get caught up. But that is why today is so important – because the message is easier to convey when the sentiment surrounds you. When it does happen, it will be too late.

Now is the time to remember: When greed becomes more rampant, a good adviser isn’t going to go along with clients who want to eschew diversified portfolios designed to achieve long-term investing goals. They won’t play yes-man to the investor who wants to put a huge slice of their portfolio in one hot sector. No, the quality adviser will remind clients that avoiding the behavioural errors emotional extremes can bring is critical to achieving their financial goals.

History strongly suggests the fad du jour is illusory. It also shows the panic at the bottom is very likely the prelude to a new bull market. However, that advice is going to cut against popular sentiment and everything investors are hearing. The challenge a quality adviser faces is getting that message to sink in despite the din telling them the exact opposite.

This really highlights what, to me, a great advisory relationship looks like: It is one where the professional is looking forward in every sense of the term.

Too many professionals in this industry fight the last war in an effort to merely gain or retain assets. If they had a problem getting folks over 2008 memories or the fear of a correction, that is the lesson they think is apropos all the time.

This is a trap. Look ahead at what your clients will be feeling soon – and coach them about what to expect. Build a foundation you can point to when irrationality – whatever it looks like – does arrive. Educate clients about market history, and how even brilliant people like Sir Isaac Newton lost their shirts by getting carried away with greed and fear of missing out. Advise them that, as legendary investor Benjamin Graham famously wrote, “The investor’s chief problem – and even his worst enemy – is likely to be himself.”

During greedy periods, investors see fast roads to riches everywhere. During fearful stretches, they see risks everywhere. Truly great advisers, in my view, get folk to look past what is immediately around them and see the horizon.

Damian Ornani is chief executive of Fisher Investments. All views are his own and should not be taken as investment advice.

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