Charles Ellis: The Role of Financial Advisors

The role of financial advisers

If they’re very good, financial advisers will help each of their clients come to a clear understanding of themselves, their values, their dreams, their hopes and their responsibilities and that makes it very easy to work out the investment programme that will suit that specific individual.

The investor/adviser relationship

If investors want to get good value from their advisers they will first be entirely candid and try very hard to give all the factual information that an adviser might be able to use. All their factual information about everything financial. And, a great deal of factual information, even though it’ll be qualitative, about themselves, their families and what their experience has been in the past that might really influence their thinking now and what their hopes are for the future. The more information you can give to an adviser the easier it is for an adviser to give you very helpful analysis, interpretation and judgement.

The basic principles of investment

Principles that every investor should be thinking about is, number one, the investing is all about you, not about the market, about you and how you would feel most comfortable through thick and thin because there will be thick and there will be thin. There will be good times, there will be bad times and that’s part of life’s experience. And, you must be comfortable and candid about who you really are and what your investment capabilities are and what your emotional capabilities are so that you can set a pathway you can really stay with. Staying with it is the most important single principle.

Responding to changing economic conditions

People often like to say, well, there’s a great powerful experience in this terrible financial crisis, are there lessons to be learned? The answer of course is yes but be careful you don’t learn too much because it’s a very unusual experience that we went through and most people will never go through anything like that again. So, you don’t want to be so well prepared to go through it again that you lose the chance to have positive experiences for the more normal part of life.

But, you really should pay attention to what was it about the experience of the crisis that really was shaking your confidence and might have caused you, or people like you, to do something that would have been horrible in the long run. Give you a good example: anybody who got so frightened last February or March that they cleared out their stock investments and put their money into either bonds or cash is someone who took a temporary loss and made a permanent loss. That’s a lesson we all want to learn is don’t allow current experience, no matter how acute, to be disruptive of your long term planning. The easiest example for all of us who’ve had teenage children is be very careful that the worst moment of experience with a teenage child does not dominate your behaviour towards that child. Be steady, be calm and in the long run your child will grow up to be a wonderful adult, just like you.

Winning the Loser’s Game

Winning the Loser’s Game is the name of a book that I had the pleasure of writing and keeping up to date as the years go by and it’s basically a two way proposition. Number one is to explain that the objective of beating the market is in fact a loser’s game and that most people striving to beat the market actually have very unhappy experiences. They do not succeed. And, when I say most I’m not talking about 52% or 55%, I’m talking about 85 or 90%. So, the first part is do not play the game you will not win, which is I’m going to beat the market, here I go. There’s an alternative where you can easily win and, therefore I would call it a winning game. And, the winner’s game is what is it you’re really trying to accomplish, what would work really well for you? And, then go about that specific objective. And, each of us has different characteristics of what we’re trying to do. Sometimes the characteristics have to do with how long you’re going to stay invested. If you’re investing for the very, very long time. . . I have a three year old, a six year old and two three year old boys as my grandchildren. Any investments that they’re making are investments for 80 years – that’s a long time. And, they can invest differently than could someone who was saving to buy a home or saving for college or saving for some other specific purpose that’s going to come up in a year or two. So, your time horizon’s number one.

The second thing is don’t be afraid of being candid about what your emotions are. Go ahead and accept who you are as a human being and if you can’t handle turbulence don’t invest in turbulent securities. If you are more able to handle turbulence take that chance because you can take it in stride and invest that way. But, if you will aim at the right kind of investment mission and then stay with that mission you can have a winning experience and everybody in your family, everybody in your neighbourhood, everybody in the world can have a simultaneously winning experience if they each do what’s really right for them.

Tower Hill Associates has adopted many of the ideas expressed in the Ellis and Malkiel Videos in their financial and investment planning processes. If you would like to know more please contact the Principal John Lang on 020 3865 2379

Please click here if you wish to purchase books by Ellis and Malkiel.

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