Naive Investor Chapter 2: Advisors and Managed Funds

Chances are at some point, if not already, you will feel you are the recipient of bad financial advice from a professional or entrusted your money to a charletan managed fund.

I'm almost certain you will feel this way, but the advisor and the fund managers aren't actually wrong. You are. Because financial advisors and managed funds are tools to be used, but to be used successfully you need to posess a core of financial knowledge.

Imagine if you will that you are playing basketball, and whilst a team mate is shooting free throws the coach calls you over to the sideline and says 'run a pick and roll next possession'. Alternatively he may say 'call an isolation play'. With both the core knowledge of the basketball rules and knowledge of basketball strategies etc, it enables a player to utilise the experience and advice of the coaching staff, but ultimately when the ball is in your hands it remains your call.

Thus financial planners are like a coach for finance. They may know different areas well and they are also governed and regulated by rules, but if you don't walk into their office in possession of a functional understanding of investment (including the first chapters definition) then you really can't expect to benefit from any advice they give you.

I assume then that many financial advisors spend time playing teacher to their clients. But dealing with investment is dealing with uncertainty, and thus any advise is going to be coached in uncertainty. To cast loose the shackles of naivety you need to come to terms with this.

As Benjamin Graham pointed out, if a company was guarunteed (certain) to grow 8% a year its price would be infinite. Thus by the time you found out about its share options you probably couldn't afford it and would be able to make money out of it.

But when Microsoft was a relatively unknown company making strategic moves in the unknown industry of operating system software there was potential to make money out of it.

Risk = Profit AND Loss Potential.

To use a financial advisor you need realistic expectations of what they & you can achieve.

What they can achieve:

They can make a budget for you that enables you to save.

They can advise tax effective ways to invest your money.

They can weigh up the relative risks of investment options and match them to your personality for you.

They can advise you on ways to protect your principal.

They can identify insurance needs.

All pretty banal but practical stuff, they cannot however pick winners for you without exposing you to losses of the same magnitude. They can't make you rich without earning it, if they do it would be accidental.

It extends to managed funds aswell.

Here it is vital to adopt realistic expectations of what you can achieve, none more vital than in security analysis and share portfolios.

The easiest cheapest and often best performing managed funds are low cost index funds because they will achieve the average market returns.

The art of picking winners is much more difficult. Very few highly educated, very informed security analysts and professional investors actually beat the market consistently.

It is naive to think you can walk in from the street and excellerate the growth of your wealth beyond every dedicated investor in the market.

Picking winners in other words requires you to pick a winner picker first. Something you are unlikely to do amongst all the noise in the managed fund market if you have no actual financial literacy.

Where a financial planner might be thought of as a coach, a fund manager is a teammate. That is at any time you can delegate the task of investing to them. Just like distributing the ball to (hopefully) a star player.

You cannot successfully make that decision if you aren't willing to put the time and effort into understanding the fund manager you are delegating your financial wellbeing to.

In summary, beating the market is very very hard either way. If you aren't able to put in the effort, you absolutely should become what Benjamin Graham calls a 'defensive investor' placing 25-50% of your money into good quality bonds and 50-75% of your money into shares, specifically a low cost index fund.*

Why? Not because it will make you rich beyond your wildest imaginings, but rather because it requires little to no effort or interest to maintain and will take the emotion out of investing for you. At the very least you won't be stressing over where your money is all the time.

Otherwise as it comes to taking advise, or picking a managed fund or any other person you bring into your financial sphere - they can only be as useful as your knowledge base allows them to be. You in the end make the decisions, they operate under the assumption that you understand how they operate.

Next we'll move onto creating financial plans, expectations etc.

*I should point out I am not qualified to give financial advice. (yet)