Choosing who to trust with your life savings doesn't have to be like finding a needle in a haystack. The clue lies in the markets...
With millions of financial advisers in the world (and thousands in the UAE alone) how do you choose one?
It isn’t exactly easy to know where to start, never mind to identify a trusted firm to work with.
It’s like looking for a needle in a haystack.
But there's one simple rule you can follow...
The challenge for most corporate executives and business owners seeking advice is that it’s tricky to know where to begin as the terminology used in financial services isn’t helpful.
Do I need a financial adviser, a financial planner, or a pension planner, or perhaps a wealth manager or an investment manager? What’s the difference?
Add these to a sea of Google results, and it's often easier to give up at the first hurdle...
"I don’t know who or what I’m looking for, I’ll just keep cash and hope for the best".
You end up missing out on the opportunity to capture the extraordinary returns of capital markets (in the most efficient way)...
Not to mention having someone help make life a little easier.
So, where to start?
Firstly, you can rule out the stock pickers.
These people make predictions about which stocks are going to be winners and losers.
Secondly, eliminate the market timers.
They’re the ones who get into and out of the market, trying to buy the dip and sell at the peak.
So, what's the problem with these strategies?
Simply put, it’s unlikely any individual will be able to pick the right stock and the right time—especially more than once.
Over 50 years of research confirm people can neither pick stocks nor time markets consistently.
The smartest person on the planet isn’t as smart as the market. The market has already taken everything you might be thinking into account.
Markets are smarter than advisers (like computers are smarter than chess players).
They do a sensible job for sensible reasons. They're efficient.
Buyers and sellers have to come together to make a trade. Prices have to be low enough to attract new investors and high enough to entice someone to sell. Both sides have to feel good, or the trade doesn't happen.
So the one simple rule you can follow when choosing your adviser?
Trust the financial adviser who trusts the market.
These people help investors try to capture the extraordinary returns of the market, rather than trying to outsmart it.
Decades of Nobel prize-winning research support this.
So does the explosive growth of index funds.
Dimensional Fund Advisors is based on evidence around the pursuit of higher expected returns than vanilla index funds offer.
But all these strategies are based on the idea that markets do a good job of incorporating information into prices.
We see this every time a big piece of financial news sends stocks up or down.
The market is a giant information processing machine.
Prices change as millions of buyers and sellers react to new information. Prices settle at “fair” values that seem reasonable to both the buyer and the seller. This should give people the confidence to trust the market rather than fight it.
Historically stocks have returned about 10% per year.
That’s about 7% above inflation.
Naturally, there are variations and no guarantees, but these are generally reasonable returns to buyers of shares in a company.
What’s the catch?
It’s daunting to figure out what exactly to do, and how to develop a sound investment plan.
But few things are more important when investing your life savings.
Trusting the markets is simple, but not easy. Especially when times get tough.
You need to be a long-term investor.
If you accept this common-sense (evidence-based) approach to growing your wealth, you owe it to yourself to work with an advisory firm that does too.