Recent talks with people that have an academic background surprised me when it came to misconceptions or errors of judgement regarding investing:
1. After a crisis it’s good to hold on to cash because if it happens again, they’ll be prepared. We’re seing record cash levels at the moment held by clients in banks, that should there really be another large hit to sentiment, global growth the tools to counter the crisis could in many cases lead to inflation.
2. Not looking at growth rates, change in growth, performance in percent but looking at absolute numbers or account balances and being lulled into a false sense of security that leads to underperformance or an upward change in spending appetite.
3. When entrusted with managing a fund for beneficiaries: Not investing the generated income with an eye for large unforseen expenses or sharp corrections in value of the investments, but spending on the basis ‘what comes in can be spent now’. This pitfall is very common. We tend to forget the tough times and adjust our expenses to our income in good times.
4. Falling Knife: Gold has come down; so now must be a good time to buy. It’s come down 20-30%. – The issue I see: Not looking what the move up was in the first place, from which level.
This is where I see my value added service:
My role as an asset manager is not to be popular when looking after money in entities set up to be for rainy days (years, decades) or when advising clients planing long term investments. Rather it is to make rational decisions based on a wide range of analytical tools that can increase the probability. I guess you could liken the service to a financial drill instructor or personal trainer. The advantage is gained by years of personal experience and/or from knowledge passed on by teachers, mentors and literature.
In some cases, even people with lots of knowledge will have to bow to pressure from majorities. The crowd effect. If everyone is investing in XYZ, why aren’t we. Or: Look how well that investment has done, why didn’t we do that! This leads to mental paralysis or our instincts kicking in: either ‘get me in on this deal’ or ‘get me out’ . Instincts are of course impulsive behaviour. If you’re familiar with supermarkets and how they are set up, you’ll know that is not the healthy vegteables and fresh fruit you will be tempted by. It’s in those moments you need an independent adivsor that can give you arguments and statistics that change your mind so that you choose what makes sense for your account and long term growth.