Investing Compass

This article was first published in the National Post on April 29, 2023. It is being republished with permission.

by Tom Bradley

I’ve been asking a variety of people what the most common barriers to better investment returns are. Certain mistakes such as chasing past performance, fear of missing out (FOMO) and a lack of interest regularly crop up in their answers. The one I’m going to address here doesn’t come up as often, but, in my view, is super important: investors believe their advisers know more than they do.

That’s a mistake, and it’s important, because it creates unrealistic expectations for an endeavour where realistic expectations are a must. Investing isn’t about the sizzle; it’s about the steak. It’s not about what might be possible, but rather the strategies and behaviours that give you the best chance of succeeding.

You’ll have a better idea of what I mean when I break down what advisers don’t know and what they absolutely should know.

I don’t know

Advisers need to have these three words in their vocabulary, not because they’re lacking in knowledge, but because so many things about investing are unknowable. How will the economy affect my portfolio? I don’t know. When will the stock market bottom? I don’t know. What will the price of gold or bitcoin be? I don’t know. What will my return be over the next few months or years? I definitely don’t know.

This may seem obvious, but think about how many advisers have a strong view of where the market is going based on their reading of the economic tea leaves.

That’s not to say advisers can’t have educated views about more predictable factors. It’s reasonable for them to set expectations for five-to-10-year returns for broad asset classes (stocks and bonds). Hopefully, they have a good sense of where valuations are in the historical context, and where we are on the greed-versus-fear spectrum.

Must know

Your adviser must be able to help you formulate a plan. I’m referring to an investment plan as opposed to a full financial plan since most advisers aren’t qualified to do tax and estate planning, or cash-flow projections. There are several aspects to this.

Asset allocation: Asset mix is the most important tool you have in finding the right balance between potential return and risk. Before you pick your first stock or fund, you need a portfolio framework that fits with your goals, time frame and personality, and diversifies the risk.

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Product knowledge: Your adviser should know everything about the products being used to implement your plan. Remember, there’s no silver bullet. Every investment has trade-offs. For example, strategies with less short-term downside risk produce lower long-term returns. Conversely, aggressive equity funds with the potential to have huge years will experience big down years, too.

Asset location: Your adviser should have a comprehensive knowledge of all account types (that is, registered retirement savings plans, tax-free savings accounts) and how best to use them for tax efficiency.

Autopilot: The more automatic your investment process is, the better. If you’re growing your portfolio, pre-authorized contributions that come out of your chequing account every month work well. If you’re living off your assets, your adviser should have a system in place to provide you with a regular paycheque.

Cost management: The investment return you’re going to retire on is net of all costs. Your adviser should be able to explain what you’re paying and how they’re working to reduce it. There’s no room for vagaries here — they know exactly how they’re being compensated.

Temperament: Assessing whether an adviser is a good investor when picking stocks and funds is difficult, but less important than you might think because your portfolio can be invested in products that are professionally managed. The behavioural side of investing is where people need the most help. Your adviser needs to be steady and keep you on plan, particularly during challenging periods such as the speculative euphoria of 2021 and the weak markets of 2022 (it’s why we named our firm Steadyhand).

The most important thing

Your adviser needs to be an absolute expert on one more thing: you. What makes you tick? How long before you start drawing on your portfolio? Who is dependent on you? How do you react to portfolio declines? How do you like to be advised and reported to?

My partner Lori Norman always warns prospective clients, “I have a lot of questions.” Your adviser should know all about you without needing to be reminded.

You get the picture. Your adviser may not know what they don’t know, but you should. Tap into what they’re good at and make sure you’re not paying for the rest.