There’s no foolproof way to measure your success as a self-appointed financial planner. You may never know how your portfolio would perform if you paid a professional to manage it versus doing it yourself. But you can assess to what extent you possess the intellectual acuity and emotional control to invest wisely.
For starters, here’s a test: When you hear the disclaimer “Investing in securities involves the risk of loss”, how do you respond? Ideally, you nod and think, “Of course it does!”. You’re ready and able to weigh risk and reward. As much as you dread seeing your valuations fall, you understand that markets are inherently unpredictable and contingency planning comes with the territory. Even if a valuation dips, you also know that you it’s only a loss if you sell at that point.
If you feel a flutter of worry as you ponder the possibility of “paper loss”, that may be affecting your decision making and causing a long-term loss which is far greater than short term fluctuation.
Another test is how you react to days when markets sink. If you think, “This happens. It’s how markets are supposed to work. They go up. They go down”, that’s a good sign. Extra credit if you spring into buying action (“Maybe there’s an opportunity here”), while everyone else freezes with fear. You recall Warren Buffett’s “be greedy when others are fearful” philosophy and look to snap up superior stocks at a discount.
On the other hand, if your mood turns dark simply because the market fell sharply, that’s a red flag. One reason that some perfectly capable investors choose to hire an adviser is for the hand-holding. During down days, advisers brace for calls from jittery clients who need reassurance that their nest egg is still safe.
Financial planners calm panicky clients by providing information, explanation and re-assurance. They also urge investors to shut out media messages that overdramatise market swings and portray every down day as potentially calamitous. Sensationalist headlines sells media and buys clicks but it’s not great for emotional investors.
When markets fall for example, you’ll always find market commentaries predicting that, “This is the canary in the coal mine” or “Today’s move is nothing compared to what’s ahead.” Armageddon or inviting you to follow their prophecy and make it self-fulfilling? You’ve heard the news stories of some of the Bank viability or financial strength warnings but in most cases its only when everyone panics and makes a rush to withdraw deposits does it cause that bank to suffer. Later, a “big player” picks up the asset at significant discount and absorbs the best parts in to their extensive brand.
DIY investors who can shrug off these alarmists and maintain a steely focus on their long-term objectives because they expect to ride out cycles and come out ahead in the future will have an advantage. Perhaps the best way to test your fortitude as a DIY investor is to envision a market crash. Ask yourself how you’d feel seeing your portfolio drop 20 percent or more at once. Would you wish you could call your adviser for much-needed comfort, perspective and strategy? Or would you brace for impact, contain your anxiety and adopt a healthy, opportunistic outlook? Historically, indexes have rebounded from sharp sell offs and have continued to rise over time. No armageddon, the world keeps turning! In fact, they usually turned out to be a great buying opportunity for calm investors.
Another consideration: If you try to assign 100 percent blame for a plummeting market to a single cause such as a politician or political party, that’s not going to serve you well. It’s like managing a sail boat on the open seas with a range of weather conditions. You can’t control the wind but you can control the sails. Best decisions on when to sail or when to find port also assist the journey.
Over the past few decades, “holistic” financial planners have begun to supplant traditional wealth managers. They provide “comprehensive financial planning,” which may include saving and spending strategies, legacy planning, tax and retirement planning and even helping you seek a pay raise at work and plot your career path. More like a coach or teacher while ultimately you’re in charge.
You may elect to do all of this yourself. And you can certainly succeed if you have the time, tools and inclination to digest lots of data. But the real question is how will you know which path makes more sense? Usually when its too late to change it.
