Palm Springs California based Wavelength Financial, provides online financial education to both individuals and advisors. CEO Jeanne Klimowski was kind enough to add a comment on a recent article regarding the Do-It-Yourself financial planner problem. The article tried to articulate the need for everyone to have a guide. Someone who can bring another and more objective viewing point to the financial problems that people tend to manage poorly.
Her valuable additions included:
- Unfortunately these messages often get lost during multi-year bull runs, when investing seems so very easy 🙂
- There’s a likely upside to the return of volatility—DIY investors may get a reality check which may motivate them to seek help so they can weather the other parts of the cycle successfully.
One of the important aspects of accumulating wealth is to know that gains are not random. You must know how you do it.
Sometimes the only requirement is for you to take part. Financial genius is a rising market. Not challenging, but of little value in the long run, because rising markets are not persistent.
Investors sometimes forget history and, too late and without recourse, discover, markets do not go to the moon without rest stops and detours.
Risk is always there and markets tend to approach a long term average rate of return. The stats folks call it “reversion to the mean.” Reversion makes sense if you ever try to understand why the average rate of return (ROR) is what it is.
Some ROR factors include.
- Increasing market size (population, demographics) or market share (taken away from competitors)
- Changes in market accessibility. (With no internet, Amazon would not exist)
- Productivity improvements (cost leadership usually)
- Innovation (new products, ideally protected by patents)
- Inflation, (the measuring stick changed size)
- The real value of money (usually 2% to 3%)
- Tax and regulatory environment
- Perception of how the factors are changing.
- Relative value compared to other forms of investment
The last five of these tend to be either passive or negative. Only the first four create new value for a particular business. If you cannot discover which of them is driving value, how can you really estimate that the business is providing above normal rate of return? It could be just a crowd of enthusiastic and uninformed bidders at the stock exchange auction.
According to Warren Buffett, risk arises from not knowing what you are doing. Learn how or get help.
Having been involved with children sports many years ago, I have noticed there are two kinds of mistakes. Physical (tactical), like I missed a foul shot, or dropped a pass. And Mental, (strategic) like I lost track of how many outs there were, or what route the quarterback expected, or how much time was left on the clock. Coaches only care about the mental ones. Everyone makes physical mistakes.
Financial planning has those too. An advisor can help you understand and execute both aspects.
They can help with planning, organization, products and connections. The physical part. More importantly, they can help overcome your built in biases, blindspots and lack of discipline. The mental mistake part.
Expand your strategic ability.
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Don Shaughnessy is a retired partner in an international public accounting firm and is now with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.