Cycle is the Destiny
These are among the most famous shlokas of the Bhagavad Geeta. These shlokas mean that whenever “dharma” (righteousness) declines and “adharma” (injustice) rises, the God descends on the earth.
Many have interpreted this as the God descending in a physical body. The fact is, something takes place that destroys “adharma” and restores “dharma”. Call it the divine intervention or the “invisible hand” introduced by Adam Smith, there is something that happens to restore balance.
The recent events of demonetization also seem to be one of those events that may succeed in restoring the “dharma” by destroying the parallel economy. The amount of black money circulation had gone up a few notches in the last few years. Experts estimate than the black money was roughly 1/3rd the mainstream economy. This led to a major imbalance and the righteous, honest taxpayers were the biggest sufferers. This had to stop.
Now whether the Prime Minister takes a step, or the finance ministry or the Reserve Bank of India; that is not so important. Philosophically, this was destined. This had to happen and someone had to be instrumental.
This is what the history of financial markets suggests. Cycle is the destiny. Cycles are destined. However, one tries – and that includes large corporate houses, or banks or financial institutions, or regulators, or governments – one cannot change the destiny. At most, one can only delay the inevitable.
If that is the case, what should an advisor do?
It is ironical that many clients expect the advisor to be able to see the future. Often, expertise is equated with the ability to forecast the future well in advance.
An advisor’s job is not to predict, but to prepare. Many an advisors have tried in vain to predict the future. However, what happened in last few months showed how poor the ability to predict was. Events like Brexit vote, Trump victory or India’s demonetization were unpredictable. Majority failed at predicting these events. In such a case, a good advisor would present the various possible scenarios and ensure the client is protected or at least prepared – both emotionally as well as financially.
It is important to put things in perspective
What is important for an advisor is to put things in perspective.
First and foremost, an advisor must impress upon the investors that “ALL INVESTMENTS ARE SUBJECT TO CERTAIN RISKS”. There is no such thing as “risk-free investment”. Even the humble bank deposit or a Treasury Bill carries the risk of loss of purchasing power due to price inflation.
Anyone attempting to earn higher than inflation must face some other risk, e.g. volatility, credit, liquidity, etc. The last two can be managed through proper planning. However, marketwide volatility cannot be.
Various events have only resulted in the markets being volatile. And volatile markets move only in two possible directions – up or down. That is the short-term movement. However, sometimes the uncertainty may lead to some companies getting irreparably damaged. Investors may lose their entire capital if invested in such companies.
What is the remedy?
First and foremost, the quality of the company one invests in. In order to make a prudent investment, the company should be financially strong and managed by competent and honest management. This in itself is a great safety mechanism. However, a financial advisor may or may not have the requisite skills to identify such companies. A typical investment advisor or a financial planner may be competent in helping a client identify, articulate, quantify and prioritize goals and then plan to reach these.
Purchase at reasonable price
Even good quality stocks or bonds must be purchased at a reasonable price. If one pays too much for a good thing, the investment returns would be poor. You may refer to the Infosys story in my book “Rising The Roller Coaster – Lessons from financial market cycles we repeatedly forget”.
In such a case, it is better to take help of professional fund managers – be it mutual funds or portfolio management services. Do your due diligence before adding the schemes in your recommendation list.
A professional manager would be better able to take care of identifying good quality companies for investment.
However, this may still lead to some judgmental errors. Even the best of the investors are prone to making some mistakes. History is replete with examples of the greatest getting it wrong once in a while. Read about the mistakes made by the father of investing Benjamin Graham, or Nobel Laureates in the book “Riding The Roller Coaster – Lessons from financial market cycles we repeatedly forget”.
That is where diversification helps. It is a protection against one’s mistakes or judgmental errors. As some of the academicians say, “Diversification is the true free lunch in financial markets”.
Incidentally, both professional management and diversification are easily and economically available when one advises the clients to invest in mutual funds.
Still, it is important to stay put through the recommended investment horizon, which is the function of the respective asset category. That requires financial as well as psychological ability on part of the client.
Most financial planners and advisors help their clients keeping in mind their financial ability to stay put – meaning that the funds required in the short term are not invested in equity.
However, this still does not take care of the psychological ability. Investors are bombarded with all sorts of news throughout the day. There are many analysts – some professional and some “so-called” – that keep giving their views. Sometimes it becomes impossible for the investor to figure out whom to believe. In such a case, often fear (or hope or greed or many other emotions) sets in and the investor is likely to make some big mistake.
Save investors from making those big mistakes
A good advisor can play a role of a sounding board, a moderator, a coach, a guide. The investor often needs perspective, an investor often needs reassurance, an investor often needs a reminder of sticking to the financial goals. A good advisor must help an investor stay away from costly mistakes.
The role of an investment advisor is not just important, it is critical. Understand and communicate the importance. Understand and communicate the value you add to the client’s life. Go ahead and make a difference.