80. What is best investment advice we can give today?

 

I was talking to a fellow financial advisor the other day

She is scheduled to meet one of her long time and valued client for portfolio review and to provide possible recommendations for re-allocation with an objective for faster recovery as the portfolio is still down by 20% even though it was placed more than 5 years ago

This is one of the most challenging situation for any financial advisor - what advice can we give a client who has entrusted to us their life savings expecting that the product solution we provided in the past would really make them better off, what if after years of patiently waiting, they are still not seeing any gains and worse, is in a negative position

Situations like these challenges the confidence of the financial advisor in the capital markets where the funds are invested, we are constantly reminded by investment experts and gurus  "that over the long term, equities almost always goes up...", how long do we need to wait for this to really happen, obviously five years is not enough, 10 years? 15?

I always have a healthy respect for the "uncertainty and volatility" of the market, I have seen fund values rise and fall since the 90s, the Asian Financial Crisis, Dot com, 9/11, mortgage crisis of 2017 and the most recent covid induced crisis

I always take the advice of the so called "experts" with a grain of salt, because ultimately as a financial advisor, I am the one facing clients, I am the one responsible for providing advice that may or may not  help clients achieve their financial objectives, at the end of the day, it is on me!

So what is the best advice we can give today?

Critical Assumptions:

1. equities have a long-term upward bias
2. equities are volatile by nature, hence unpredictable over the short-term
3. volatility strategies should be in place from the onset (cost averaging for multiple pay and portfolio allocation for single pay)

Some factors to consider:

Time Horizon of the client - 5 to 10 years (fixed income portfolio), 11 to 15 years ( 60% equities, 40% fixed), 15 years or more ( 80% equities, 20% fixed), of course these are just rule of thumbs, actual allocation should include the client's risk profile

Where to invest? Local or Global - Global funds are quite popular these days as various companies have launched various versions of their own in the past few years, it promises access to developed markets, foreign diversification and global management expertise

First a disclaimer : This is just my personal opinion and should be in no way to be constituted as a financial advice, I would suggest you continue on your studies and research, because ultimately, you are responsible for your client's financial well being

I prefer local funds for the following reasons

Global funds are typically structured as "funds on funds" offered by local investment houses and it naturally translates to various levels of "management fees", first, the fee charged by the fund originator, second the fee charged by the fund aggregator, third the fee charged by the local investment house and fourth the fee charged by the company offering the product to the end user (our clients)

second is that these funds are originally denominated in USD, and as such, if the product is bought in pesos, clients can be exposed to FX risk, it is as if we are buying USD at the current level, if the peso starts appreciating, it will affect its conversion from USD to pesos

third, it may be over-diversified - while it is true that diversification minimizes risk, also remember that it also puts a cap on the upside, portfolio theory places the ideal diversification to just 18 to 22 assets, anything higher may lead to over-diversification

final word is that sophisticated is complicated (and expensive), fees will eat into returns and be aware of conversion risk

all the best my friends!

#acgadvice