"HatTip" - What's Your Attitude to Pain?!

The inspiration for this piece comes from US based adviser Alan Roth. In a recent blog he pretty much summed up everything that is wrong with my profession's fixation on investor "attitude to risk".

Here is the process: you plod through a questionnaire given to you by your adviser; the adviser feeds the answers into a bit of software; hey presto, you are told that your attitude to risk is 8 out of 10, or “balanced”, or “low-risk” or some other meaningless grading.

It is meaningless because a risk score simply pretends to know demonstrates how much pain someone can bear to take when markets fall.

But just because you theoretically can mentally stomach a large loss in your portfolio does not mean you have to. This is because - on its own -the risk attitude questionnaire bears no relation to the actual return that a client needs to get to achieve her life goals.

For example, if your portfolio simply needs to “earn” 3% a year to maintain your lifestyle then why on earth would you be in a portfolio that carries the potential return and commensurate risk of, say,  8% a year?

A risk questionnaire, as seen yesterday

Advisers that answer with "my client's attitude to risk score indicated that was the ideal portfolio" are just doing half a job.

Even worse, imagine a “cautious” risk profile client, advised to invest in a portfolio that will ensure he runs out of money before he runs out of life. What is the biggest risk for all of us? A temporary dip in the value of our investments (because markets go down as well as up) or a permanent drop in lifestyle when we run out of money?

Risk assessment questionnaires and their ilk are only ever the starting point of a conversation about your investments. Far more important is the return you need to get on your assets so as not to run out of money during your lifetime. When you know this figure then you can construct a portfolio that has the best chance of achieving it (in no way guaranteed etc).

If the resulting portfolio is too racy (or too cautious) for you, then adjust accordingly and accept the consequences on your lifestyle. But remember: markets generally recover from falls; time is a great healer. However if you run out of money in later life then all the time in the world will not save you: the dosh is gone and it ain't coming back. That is real pain.

A short term paper loss or a long-term drop in living standards? The choice is yours!

"HatTip" - Promises, Promises

In case you missed it, there was an election recently.
And in the 12 months leading up to it, a lot of promises were made. Will they be kept?

The Labour Party seemed to spend the dreadful Mansion Tax about 15 times over. The LibDems... well, I was not listening to their promises. Come on, hands up - neither were you.

As for the Conservatives, one has the feeling they were making promises on the assumption they

"HatTip" - Say What?!

Most purported financial journalism is just advertising, held together on the page with reheated topics and lazy copy.

And an awful lot of that lazy copy (or “financial porn”) is designed to titillate, to sow seeds of doubt, or to get the reader to take action of some sort. Invariably these urges - if acted upon - do more harm than good.

Then, sometimes, you read something that is not so much financial porn as plain baffling. So it was with a recent article from Mark Dampier of Hargreaves Lansdown. For the record, I think this brand is fabulous; not so much for what they do but how they do it: the marketing, website and whole “customer experience” is second to none.

Mr Dampier’s article began by saying how investors have had an uneasy ride since the financial crisis of 2007-9.

To which I thought: “Say what?!” Watch this BAFTA nominated video to find out why: it only runs for a few minutes (though you may think it feels longer).

What should you take out from this?

In essence, when it comes to financial services. do not take things at face value: challenge; question; interrogate. If you do not wish to do this yourself then get a financial planner to do it for you.

Because the surest way to get diverted off your financial plan is to be influenced by external factors that do not have your interests at heart.