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RP: It can be very tempting, especially if you’ve learned about evidence-based investing, to manage your investments on your own. But, although it’s possible, it’s not necessarily a good idea.
Vanguard, which is best known as a provider of low-cost index funds, says investors who use an adviser usually achieve better results than those who don’t.
NC: We spend a lot of time promoting the value of advice, we have a framework here called Adviser Alpha, which talks specifically around the value that an advised relationship would deliver, over and above what a client left to their own devices might achieve.
We don’t say that, for clients who have time, willingness, ability to self-serve, that they can’t achieve a great outcome too, because that’s certainly possible. We just say that it’s hard and our message around the value of advice and what that adds, is really very clear.
RP: So, why do DIY investors often underperform those who use an adviser? One of the main reasons is what’s called performance chasing.
NC: Where an adviser really can add value is their role as a behavioural coach, or for want of a better phrase, an emotional circuit breaker. Because, I think we see time and time again, when clients are left to their own devices, they can fall into some pitfalls and they can make some very costly mistakes.
One of the ways in which we see these mistakes manifest is when clients invest in what appears to be yesterday's winning funds; expecting those funds to repeat the performance and to prevail for the next three, five, seven, nine years. So, there’s a clear pattern where the money tracks. Now, that’s trying to tie markets, which is not an advisable thing, but typically, again, we see investors get there too late, by which I mean, there is a big difference between the fund return and the actual return that the investor experiences. So, just in those two examples of chasing yesterday's winners and getting there too late, we see some behaviours that really erode value.
RP: But it’s during periods of market volatility that a good adviser will really earn their fees. For unadvised investors, the temptation to bail out when markets start falling sharply can be very hard to resist.
NC: Markets will inevitably experience degrees of volatility and, that’s the biggest intervention that an advisor can make. Jack Bogle, coined the phrase - the founder of Vanguard - ‘And don’t just do something, sit there.’, in other words, expect the volatility, be confident in the plan, ride it out for great investing outcomes.
RP: In short, yes, you can manage without a financial adviser. But it may end up costing far more than you expected.
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