Financial Professionals

Professional Portfolio Management

Why This Is The Time For Professional Portfolio Management.

 

Ross Rickard, CFP®, FCPA, CTA
Chief Executive Officer

Whether it’s preparing for a comfortable retirement, establishing a legacy for your loved ones or simply generating wealth, we all invest with goals in mind. We are fortunate for the increasing number of ways to invest and the accessibility to investment types.
However, at no time over the past 20 years have we seen so much value in having your investment affairs professionally managed.
Although there is a myriad of reasons for this, we will highlight the three most prominent as of today.

 

1. Goodbye, Smooth Sailing.
We are towards the latter stages of what has been a highly prosperous decade for most assets. The strong growth post-GFC has been exacerbated by the large degree of money added to the economy over this time. Yet this stimulus package has now come to an end. Looking forward to the next decade, it is hard to imagine a period that will produce such broadly strong returns, particularly as current annual inflation levels are at 1.3%. I am not alone in this thinking, with many forward return projections being well below the past decades (e.g. Andrew Patterson, Chief Economist at Vanguard).
The challenge for individual investors is to remain alert to the real risks that arise in late-stage bull markets while eliminating the noise and still taking advantage of the market’s potential for sizable returns. This is a task that will not only require an expertise, a defined risk management process but also a significant time investment.
We encourage all investors to understand what is meant by Warren Buffet’s famous adage;
‘Only when the tide goes out do you discover who's been swimming naked’.

 

2. Australian Taxation Reform
Political disruption has become almost a matter of expectation in Australia’s recent history, with the appointment of our 7th Prime Minister for the decade. As the country awaits its next Federal Election and the possibility (read probability) of Bill Shorten as our eighth Prime Minister, a few cracks begin to appear in our investment confidence.
This is not due to Bill Shorten or the continued political instability, but rather a result of analysing the policies already tabled by the Labor Party. The intentions appear positive “… to help put the Australian dream of home ownership back within the reach of middle and working class families”, yet the reality may be a different story.
The drafted policies include the restriction of negative gearing, the abolishment of franking credit cash refunds, the reduction of the 50% capital gains tax discount to 25% and taxation of family trusts. These policies will impact investors. Australia should welcome serious discussion over true taxation reform, however, we anticipate that a piecemeal approach will result in several unintended consequences.
There are likely to be wide impacts on Australian investments of all nature as a result of these proposed changes. The investment re-structuring and taxation rebalancing required to reduce the impact could be quite substantial. Such options may also provide a ‘first movers’ advantage while other opportunities may be excluded following the upcoming federal election.

 

3. Investor Biases
There is no denying that individual investors now have unprecedented access to investment information and markets. Detailed security statistics and real-time news are easy to obtain online, which has begun to level the informational playing field between Wall Street and Main Street.
Yet, there is a lot more to investing than access to information. One of the most commonly overlooked elements is an ability to control individual biases. Fear and greed plague investors from achieving optimal outcomes. We so often see individuals put too much value on recent events; get seduced by easy narratives; run in herds; attribute successes to their own talents and failures to forces beyond their control.
Such actions are easy to reflect upon, however, the ability to not allow these emotions impact upon daily investment decisions is an expertise gained over time.
These emotions become even more difficult to manage during times of dislocation or high-stress market events. It is at this stage you need a professional to act without emotional influence and make decisions about your future based on a repeatable, analytic-driven process and long-term objectives.
Would you represent yourself in a court trial? Is your future financial independence any less important? It reminds us of the adage; “A man who represents himself has a fool for a client.”

 

Conclusion
In summary, the tides are turning, both within the political landscape and the economic cycle. I anticipate that these fluctuations will increase the divide between professionally managed portfolios and those that are not. It is also important to highlight the pitfalls of our individual biases and their presence, independent of information accessibility.
Recent research estimates that wealth professionals add approximately 3% in relative return to an individual investor. This is convincing in itself, though gets compounded when reviewing a wealth professionals full value proposition. Investors can also benefit from detailed structuring, risk and asset protection and proactive tax advice, all of which can contribute to additional relative return.
Further, utilising a wealth professional can alleviate stress and free up time to do the things you love most in life, which is a key step to achieving happiness. This is discussed throughout Ashley Whillans research (Professor at Harvard Business School) and well summarised in the recent HBR Ideacast Episode “Using Your Money to Buy Happier Time”.
We have been managing clients’ money for over 20 years, and we still maintain many of these relationships. We specialise in how to invest through various economic cycles and have already strategies waiting to minimise the impacts of the proposed tax reforms. If you believe it is time for professional portfolio management or a second opinion, please get in with us touch below. We also offer a free review of your existing portfolio.

 

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References:
  1. RBA, Measures of Consumer Price Inflation, 24 April 2019, https://www.rba.gov.au/inflation/measures-cpi.html
  2. PIMCO, ‘Late Cycle vs. End Cycle Investing.’, January 2019, https://www.pimco.com.au/en-au/insights/economic-and-market-commentary/global-markets/asset-allocation-outlook/2019/late-cycle-vs-end-cycle-investing
  3. Magellan, ‘10 cognitive biases that can lead to investment mistakes’, May 2017, https://www.magellangroup.com.au/insights/10-cognitive-biases-that-can-lead-to-investment-mistakes/
  4. Vanguard, Putting a value on your value: Quantifying Advisor’s Alpha, September 2016, https://www.vanguard.com/pdf/ISGQVAA.pdf
  5. Vanguard, Where's the global economy heading?, 31 May 2018, https://advisors.vanguard.com/VGApp/iip/site/advisor/researchcommentary/article/IWE_InvVideoWhrIsGlblEconHdng