By Andrew Hatherley on Dec 17, 2019
If you believe some of the world’s greatest investors, such as Benjamin Graham and Warren Buffet, it’s not investments that cause people to lose money; rather, it’s people who cause people to lose their money. What is meant by that is investing with sound principles and intelligent practices will always have a greater likelihood of success. However, without a solid investment plan and the discipline to stay the course, investors are much more vulnerable to their emotions which, more often than not, can lead to disastrous results. In other words, an investor’s worst enemy is likely to be himself.
To use a more familiar analogy, consider business executive who decides to get back into fitness. To ensure that he had a plan and that he would be doing everything correctly according to his objectives, he hired a personal trainer. They customized an exercise and nutrition regimen and began training together twice a week. After two months, the executive felt as if he knew exactly what to do, so he fired his trainer. After all he had the plan and he knew the regimen, so why pay for more training?
As one might have predicted, after two more trips to the gym, he stopped going. There was always something that came up or some excuse for not getting to the gym. But, the biggest obstacle was his mind which constantly convinced him that he was too tired, too busy, or too (fill in the blank) to go. He slowly began to realize why we pay personal trainers. Not to give us the plan or the regimen, but to avoid the behavioral traps that can cause us to lose focus and abandon discipline. It’s the trainer who holds us accountable and pushes us to achieve a level of performance beyond our current experience.
Sound investing is very similar to a commitment to an exercise regimen. It requires a clear objective, a well-conceived plan, tailored strategies and execution to be successful. But, in investing, as with exercising, it is typically the client who will diverge from the plan, which is why you need a coach.
It’s not the Plan; It’s the Execution
Developing the investment strategy is actually the easy part. A good financial advisor might charge nothing to develop the investment plan. The hard part, for which financial advisors truly earn their pay, is to instill the discipline their clients need to ignore all of the “noise” while staying centered on their objective. Essentially, the most important job of a financial advisor is to keep their clients from making the typical investor mistakes that lead to under performance.
The real work of a financial advisor starts with an education process to help their new clients to understand that it’s not their investment strategy that matters most in investing success; it’s the investor’s behavior that will have the greatest impact.
A good financial advisor will be willing and able to be your investment coach, keeping you focused squarely on your long-term objectives rather than the market-shifting macro events of the day. He or she will help you avoid the many common behavioral mistakes that lead to under performance, or worse, financial devastation.
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