When Fiduciary Care Meets Profit, Profit Wins

Like the black rhinoceros, investment counsellors that place the interests of their client above their own are close to extinction. In the last 30 years, the investment industry has morphed from making money for clients to making money from clients. As a result, sensible investors should question what they own and why, and not assume that managers and advisors are representing their best interests.

The US stock market makes up 59% of the FTSE All-World Index of listed companies by size of their share capital. The multinational technology stocks of Apple and Amazon make up 12% of the S&P 500 index of the 500 largest companies by capitalisation, 40% of dividend revenue coming from outside the US. As stock prices continue to reach new all-time highs, financial pundits and managers are warning of a crash.

Expert professionals and computers in financial institutions, pension funds and life assurance societies account for 90% of all trading in today’s stock market. Thus, a crash in prices will affect most of us, in one way or another.

As central banks keep printing money and holding interest rates artificially low, savers have been forced out of what have traditionally been safe assets into risk assets, and many have been enticed to ‘gear’ their investments to secure higher rates of return. The current bull market in stocks began with the crash of 2008 – 2009, and whilst it is impossible to predict with any certainty when a decline in prices will come, we are clearly closer to it now than we were twelve years ago.

As investors, we should now be taking responsibility for our desired investment outcomes, examining ourselves, and asking questions of our managers and advisors. Rearranging deckchairs on the Titanic did not create a good outcome for its passengers.

Likewise, we need to ask whether our investment strategies are right for us and determine the chances that they will deliver our expected investment outcomes in the face of adverse market conditions.

The biggest risk we all face as investors is ourselves and our behavioural errors of commission and omission, whether trying too hard by being over-confident or not trying hard enough by being fearful.

Studying market history shows the irrational behaviour errors we make in every crisis. In the crises of 1987 ‘Black Wednesday’, 1998 Long Term Capital Management bankruptcy, in the 1999 dot.com bubble and 2008-2009 financial crisis, stocks lost a minimum of 20% of their value. Investors sold anything that was perceived to hold risk and bought government-guaranteed treasury bonds, selling stocks in a panic as prices plummeted, buying treasury bonds just when demand increased prices.

It will be impossible to avoid costly behavioural errors in a crisis unless we have first managed the market risk by obtaining what Nobel academic Harry Markoviz describes as the only ‘free lunch’ – adequate diversification.

To the extent that you know your investments will be held for a very long time, you can automatically insure against the uncertainty of violent short-term price fluctuations, which will help eradicate behaviour errors causing permanent loss.

In a crisis investors focus on risk and safety often with those chilling words ‘too late’.

Jeremy Blatch TEP
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