The advisers' view

17/04/2008

The latest round of market volatility may have left a temporary dent on the balance sheets of many investors, but history tells us markets always recover. Unfortunately, history also tells us that panic and anxiety can lead some investors to decisions that create much bigger holes over the long-term. We spoke to three advisers about the strategies they use to coach their clients through the more challenging times.

“I think the seeds to managing market volatility are really sown during the good times,” says Nigel Baker, Principal of WHK Horwath Wealth Management. “It’s really about understanding what you want to achieve over the long term, and putting in place a strategy that will help you do that, regardless of what happens in the market during the short-term.”

For WHK’s clients, Nigel believes the current market volatility hasn’t really come as a surprise. “Of course, everyone would prefer the good times to continue,” says Nigel, “but if you’ve prepared for the tougher times, and you understand that after every boom there’s a bust, and after every bust there’s a boom, then you really should be comfortable with your long-term plans”.

Think long term

Like Nigel, Bruce Smith and Adam Phillips of Westpac Financial Planning are also upfront about the importance of thinking long term, and acknowledge that it can be an uncomfortable experience watching markets turn. “One key element of good planning is the relationships we have with our clients,” says Bruce. “Over the years I’ve done a lot of work around educating my clients as to what to expect with market volatility, so even if they’re a little nervous, they also understand that what’s happening today is just part of the normal economic cycle.”

Adam agrees, and adds that one reason investors come to see them is to seek some reassurance and a second opinion. “A big part of our job during times of volatility is about reassuring investors that the careful decisions they made 12 months ago, or five years ago are still the right decisions today, and that they shouldn’t overreact to short-term fluctuations.”

“One of my clients, an airline engineer, called me this week because he and his wife had become anxious about the markets and the performance of their investment portfolio,” says Adam. “I met with them, we went back to have a look at their original plan and goals and their investing time-frame. By the end of the meeting they were both satisfied that their plan was sound, and had even spotted some new opportunities.”

Stick to your plan

With more than 20 years experience as a financial planner, Bruce has seen some very good times, and some tough times. Regardless of what the market is doing, the message remains the same. “You’ve really got to stick to the plan you set out at the start of your investment timeframe. If your plan was good for you then and your needs haven’t changed, it should still be good for you now.” Nigel agrees, pointing out that investors should take into account all market conditions. “Even if we have clients who need to generate an income from their investment, we’ll make sure they’re boosting their cash reserves throughout the good times, because we know at some stage the markets will get tougher,” he says.

Sticking to the long-term plan doesn’t mean ‘set and forget’. Instead there’s always a requirement to regularly review the specifics of your investment portfolio. “Particularly in the good times, asset allocations will always get out of whack as the growth assets grow faster than defensive assets,” says Nigel. “So, we continually monitor our clients’ portfolios and rebalance if necessary.”

Bruce and Adam also monitor their clients’ portfolios, and try to keep client reviews to just once or twice a year. “Of course, we’re here if our clients want to talk to us, but meeting more than once every six months can put the spotlight on short-term performance, instead of encouraging the client to take a long-term view,” says Bruce.

You can’t time the market

One of the most common mistakes investors make, according to Nigel, is to think they can time the market. “It’s easy to get caught up in the moment, particularly when markets have been so strong for the last four years and investors have benefited from 20% and 30% returns. We see some people taking wild bets about selling now and trying to buy in when the market comes back,” he says. “We don’t believe anyone really has the ability to make those kinds of predictions.”

Instead of trying to time the market, one of the most effective ways of taking advantage of market volatility is to establish a pattern of regular investing. As Adam says, “If you’re investing regularly, either into a managed fund or through regular super contributions, you’re benefiting from dollar cost averaging – or buying more when the market is down and less when the market is up.”

Buy quality assets

Adam also suggests that for younger investors who have a longer investment timeframe, market volatility can throw up some new investment opportunities. “Some of my clients do see this as a buying opportunity – particularly if the market is offering better value now than 12 months ago. Part of my job is to relieve clients of their anxiety, but it’s also important to point out opportunities if quality assets are now at a better price.”

Nigel agrees that sticking to quality assets makes sense. “It’s been pretty easy to pick a winner in the last few years, but in volatile times, you have to get away from speculating. It really does come down to buying quality and sticking with it – history tells us that quality investments always come good with time. And if you’re invested in quality, it’s much easier to sleep comfortably at night.”

Understand how you feel about investment risk

The ‘sleep well’ factor is a big consideration for Adam, Bruce and Nigel, but if one thing is going to change during volatile markets, it’s how an investor really feels about investment risk. “When a client comes to us for advice, one of the first things we do is help them understand their tolerance to risk, or how they’ll feel if their investment goes down, as well as up,” says Nigel. “But in volatile times, an investor’s risk profile can go out the window – it’s our job to get things back on track.”

WKH Group uses a ‘circumstances and attitudes’ profiling tool, which is based on individual circumstances like income and lifestyle to determine an investor’s asset allocation and risk profile. Bruce and Adam from Westpac use a questionnaire style risk profiler and say investors need to take a step back from short-term fluctuations. “Looking back, if you were comfortable a year ago, you should ask yourself why you’re not comfortable now,” says Bruce. “If it’s because you’ve changed your mindset, then you need to think ahead to how you’ll be feeling when the market has recovered.”

A simple tip

When pressed about the one tip he’d offer about investing during volatile times, Nigel is realistic. “It’s not that simple, financial advice isn’t a ‘one size fits all’ proposition. There are so many other variables.” All three advisers do agree that the quickest way to lose money is to let panic and anxiety take over. “It’s well known that those investors who sold out the day after the 1987 share market crash never recovered their money, and those who stayed in, did,” says Bruce. Adam agrees: “If you’ve done your planning and you’re confident about your investment strategy, then there really shouldn’t be any reason to sell now. It’s probably the worst thing you could do.”

About the advisers

Nigel Baker is the Sydney-based principal of WHK Horwath Wealth Management (trading name of Investor Financial Planning Limited) and one of the largest independent providers of financial advice in Australia. Nigel holds a Bachelor of Commerce, is a Fellow of the Financial Services Institute, Certified Financial Planner and Chartered Accountant and has worked in the financial planning industry for 10 years.

WHK Group is a principal member of the Financial Planning Association of Australia Ltd, and is a member of Horvath International, an affiliation of independent accounting and financial services firms. Find out more at www.horwath.com.au

Bruce Smith and Adam Phillips are Senior Financial Planners with Westpac Financial Planning, and work together in Brisbane.

Bruce started his career with Westpac in 1969, before moving into financial planning in 1986. He now specialises in financial planning for clients who are no longer working, or are preparing for life away from work. As the younger partner, Adam has 13 years experience and is focused on developing long term relationships with a younger client base. He specialises in wealth creation as well as retirement planning, and has an expertise in protected equity loans.  Both Adam and Bruce are Certified Financial Planners.

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