Cape Town - Investors tend to panic in times of market volatility, economic turmoil and political uncertainty, often resulting in knee-jerk investment decisions that are seldom sensible, cautions Peter Dempsey, deputy CEO of the Association for Savings and Investment South Africa (Asisa).
“It’s important to recognise that times are tough both locally and globally, and that every country has its own problems," he explains. In his view, seeking guidance from a trusted financial adviser is more critical than ever in difficult market conditions.
"The role of an adviser is to guide you through the noise and help you to make the best decisions for your unique circumstances,” he says.
According to Dempsey, in volatile times investors are particularly prone to making impulsive decisions, driven by some common mistakes and behaviours that could destroy huge amounts of value in an investment portfolio. These include:
- Confirmation bias: Only paying attention to information that confirms your preconceptions;
- Optimism bias: Trusting your views and not the facts - or allowing your expectations to exceed reality;
- Loss aversion: Falling prey to inaction or taking only timid actions;
- Herding: Following others despite reality;
- Preference for stories over facts: Believing promises and tales of great successes and returns, which is key to the success of Ponzi schemes.
A solid plan
Dempsey notes that successful investors have a solid plan and do not sway from their path in difficult times.
“Research demonstrates that advised investors remain more disciplined, better protected and have more assets, as financial advisers are able to guide them in balancing the need to face reality with the ability to recognise opportunities and the willingness to act," said Dempsey.
Dempsey explains that a good financial adviser will look at your unique financial situation holistically and with a long-term view. He adds that this strategy is not simply about choosing investments or unit trusts, but will also involve ensuring that you are prepared financially for planned events such as retirement, and are protected against unforeseen events such as death or disability.
The future of financial advice
The introduction of so-called robo advice - online, automated portfolio management advice - should not be seen as a substitute for a financial adviser, as robo advice does not provide an ultimate solution to all your advice needs, according to Dempsey.
He notes that robo advice is useful for providing an online risk evaluation to help you manage your portfolio. It is also low cost, relatively easy to use, transparent and simple.
“However, it doesn’t evaluate complex family histories or help you to smooth your consumption or spending through planned and unplanned life events. It can’t answer tough questions in tough times, and it can’t identify and explain unusual risks and opportunities for your investments,” he explains.
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