Due Diligence for your money in the current crisis.
Thursday 16 October 2008
What questions do you ask your advisers during these volatile times?
When investment returns are poor, most people are driven by their emotions rather than methodical behaviour which results in doing nothing. It is often easier to ignore the problem rather than deal with it in a pro-active way. In fact, behavioural science tells us it is a perfectly natural emotion to do nothing.
If you are told that other investors are in the same position, the herding instinct, which is essentially protectionism, helps you feel a little more at ease which alleviates your anxieties. Yet these emotional calming influences do not deal with the route cause. You need to find out exactly what is happening to your money. This is much harder for investors to analyse because they do not know what pertinent questions to ask and what answers to expect.
Your future financial security needs to rely on rational thought, which is why we have listed a range of questions to help you become a money expert. By gathering good information, you can then make better decisions which in turn gives you longer term peace of mind. You are then more likely to achieve your goals and your emotions can be directed to more important matters in your life rather than accepting the financial anxieties of today.
Here are some questions you need to ask your advisers, e.g. fund managers, stockbrokers, private bankers, IFAs, etc that are helping you invest:
- Has my total investments outperformed the market average in total? (You need comparisons against various total return indices, such as FTSE All Share or even FTSE 250 and others, to give you a broad overview of market returns).
- For each individual investment in my portfolio, has it outperformed its relevant sector? If so, by how much? What decisions were made to actually give the outperformance? How were those decisions arrived at? What processes are in place to help replicate future decisions that give outperformance? (After all, you want to know the chances of success in the future)
- How volatile has each investment been compared to its sector? (Clearly if the investment is a lot more volatile than the average in the sector, unfortunately you are taking on extra risk without being rewarded for taking that risk.)
- Are my investments being actively managed? If yes, how are decisions made on what to buy, hold or sell? Who makes these decisions? If investments are falling, what action is taken to mitigate it?
- Whose responsibility is it for my whole portfolio to be rebalanced? Is this discretionary or advisory?
- What are the parameters of the investment funds? (Do you know what your advisers or fund managers can invest into and what they cannot invest into? Are you sure you know where your money is actually invested? Are greater risks being taken with your money than you are aware of?)
- What are both the explicit and implicit costs of my portfolio? How do these costs impact on my return? How are the managers incentivised for managing my money?
- Do I have a written investment policy statement?
- Finally, ask if your advisers or fund managers believe they have been successful in managing your money, if so, how do they measure their success? How to they plan to repeat successes and eliminate failures?
What answers can you expect?
Whilst these questions can demand ‘rocket science’ answers which may confuse you, importantly they should be communicated to you in a simple and straightforward manner and in a way you understand. If the answers are too confusing or complicated and you cannot understand, you are more likely to face more anxieties in the future. The best portfolios are ones that investors understand, which means they are most likely to stick with them over the long term.Do also remember to ask for the answers in writing.
When you have satisfied yourself with rational and methodical answers, you can then move forward within this crisis by reviewing and rebalancing your portfolio. You can therefore feel satisfied you have carried out your own due diligence on your money and are likely to then feel less anxious about the future.
If on the other hand, you do not get the answers to which you are entitled; perhaps you should consider your alternatives.
Unfortunately some investors will find their emotions over ride any effort to carry out due diligence. It can be argued that the lack of due diligence has contributed to the banking crisis – we all know how that has turned out.
We hope these questions and the answers you receive will help you build a better portfolio and help you achieve your financial goals.
posted by Murray Round Wealth Management @ 14:56,
The Authors
Nicholas Round
Nic is the Managing Director of Murray Round Wealth Management Limited, who seeks to ensure the advice provided is truly independent. Based in Shropshire with clients local, national and worldwide, Nic has strived to find the best possible service for his clients needs, by researching and studying the market, trends and philosophies. Nic strongly believes Asset Class Management will bring his clients Financial Freedom, Independence and Happiness.
Kirsty
Kirsty is our communication guru. Managing information requires considerable due diligence and her passion for organisation gives the clarity we all seek. From Shropshire, with a Psychology Degree and much travelling, she is now back in Shrewsbury...and London often, keeping us all at Murray Round focused.
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