Mirror, mirror on the wall…

…who’s the daftest of them all?

What’s the biggest financial risk you face? Stockmarkets? Unscrupulous advisers? Dodgy “alternative” investments? Interest rates? Inflation? Yourself?

All too often risk is misrepresented to be the amount by which investments go up and down. This is wrong headed, unhelpful and downright dangerous.

Real financial risks, things you should be really concerned about, include:

1. Not knowing what you are doing;
2. Not saving enough to retire with dignity;
3. Dying and leaving a dependent family;
4. Being seriously ill and not being able to support your family;
5. Losing your independence;
6. Running out of money.

Not dealing effectively with these mega issues will lead you and your family to the bread line.

How much your investments go up and down is volatility, not risk, and is utterly irrelevant if you have a proper financial plan. There’s nothing wrong with volatility, if you can keep your emotions in check.

Unfortunately your focus is much more likely to be on investment volatility than the real financial risks you face and that’s a catastrophic diversion. You are not paying the proper attention to the tings (above) that really matter.

You are your own worst enemy.

Your behaviour is the single biggest threat to your financial well-being, as much the things you’re not doing anywhere nearly properly enough (see above, again) as the things you will do really, really badly.

One example is the difference between how investments have performed and the returns made by investors. Investors have done much, much, much worse than the investments themselves.

And the simple reason is it’s all down to your behaviour. You’ve previously shown scant interest or aptitude in doing the right thing, instead you have panicked, or been encouraged to do so.

You’re undoubtedly being misled by the press, the industry, even the regulator to some extent and perhaps your adviser.

But in the end, it’s you that has to press the button, it’s you who have let your emotions run away with you. Your focus on short term investment returns is very real and very dangerous and it has exacerbated your lack of action with regard to the things that really matter (see above, yet again!)

Cutting your nose off to spite your face is never a good strategy.

Hopefully you aren’t being encouraged to buy and sell investments. If you are then you are committing financial suicide, slowly, painfully. Buying and selling regularly means more than once every five years other than periodic rebalancing.

If this is happening to you be very aware, no-one is any good at consistently predicting what will come next (chasing returns) any more than they are explaining what just happened, like that matters over the course of your financial life.

How not to cut your nose off to spite your face.

First of all, pay proper attention to the items above (you knew that was coming). Second pay attention to your financial planner. If they are any good they will be telling you the following during times of investment volatility:

1. Keep a cool head;
2. Remember that all your expenditure for the next three years is covered;
3. Plus you have a very healthy emergency fund;
4. And the real risks (you know where to find them) above are all covered off.

You might feel like pressing them on the latest events that Bloomberg (other irrelevant, life sucking finances channels are available as are reams of printed nonsense) are pumping out. You might be certain that “this time it’s different” – the most financially expensive statement that anyone has ever come up with.

There’s every chance your financial planner might start to sound a bit exasperated at this point. Hopefully they will go on to remind you, albeit wearily, that all investment is for the long-term, and, in the context of your financial plan short-term drops in portfolios matter not a jot.

If you are hearing all of this and still misbehaving you have only yourself to blame. And what the hell are you paying planning fees for?

You either trust your expert planner and do what they tell you or you don’t. If you don’t trust them then what the hell are you doing letting them look after your finances? And what the hell are you paying planning fees for?

Find someone you trust for goodness sake – everything depends on it.

Any decent financial plan worth the name is a long-term road map showing you how to get from where you are to where you want to be, regardless of what happens.

If you are 50 years old that plan should cover the next 60 years. Believe it or not a 60-year-old, in decent health, in the UK, has about a 50% chance of reaching 110.

That’s a long time to have money invested. Volatility over 6, 18, 24 months is not a risk in this context it’s a stupid distraction.

Over time investing in a bunch of top drawer companies that make and grow their profits has produced bountiful returns. These companies can be easily located in indices such as the FTSE100 or S&P500 (in the US).

Investing in them over the last 30+ years would have produced average total returns of c6.5% pa for the FTSE100 and near 10% pa for the S&P500.

There was also a fair bit of up and down. But was the pay-off worth it?

£100,000 in the FTSE100 would have grown to a total of c£800,000 since the index started in 1984. All you had to do was sit on your hands and reinvest your dividends.

If you had stuck it out (thanks to the wise/weary counsel of your expert financial planner) you would have doubled your money every 12 (FTSE100) and 7 (S&P500) years respectively.

Inflation was a mere bagatelle in comparison over the same period. Your investment returns would have beaten it hands down.

These returns are only available if you do not panic and do something stupid when the next, inevitable, annually occurring, rough patch comes along.

How long are you likely to be invested for again? And what about the money you leave to your children and grandchildren? 100 years? 200 years? What are you doing worrying about the next 20 months for?

Sensible behaviour begets great results. You’re not likely to achieve them on your own. You won’t be able to resist the urge to do something stupid.

Email us today and we’ll send you our financial planning guide – it’s worth a fortune to you, literally.