Back in the 2000’s, when all was good in the world, people didn’t care where they invested their money, it all when up anyway. It was only when things crashed that they said to you “I didn’t know I had invested in Chinese equities!” As an advisor, I am determined to learn from the mistakes that we all made back then when giving investment advice. I developed an investment process with the intention of taking the surprises out of investing. It is not fail proof but if client expectation is managed at the outset, there is certainly less room for error.
Investment Process Step 1 – Psychometric Testing
I ask pension and investment clients to complete a psychometric risk tolerance questionnaire. I use an independent company, Finametrica, for the software to complete this process. A lot of people use the risk tolerance score as the basis for their recommendation. For me, it is the beginning.
Investment Process Step 2 – Assessing Suitability
Next I ask a number of questions to find out more information about the actual investment.
What is the purpose of the investment? Is there a goal to be achieved? – Most people have never thought of the goal they want to achieve. They want to invest it and see what they get at the end. This is where good financial planning comes into play. By assessing your financial needs, you can work out the goal.
For how long do you wish to hold the investment? – Is it a pension investment with a long term or a short term investment?
Risk Required – What return is required? If we know the goal, we can work out the return required.
Risk Perception – how risky does the action feel to you? During the Celtic Tiger, property didn’t feel like a risky investment to anyone in Ireland. Would that be the same today? The risks must be explained.
Risk Capacity – The most important of the lot. Can your financial situation withstand the impact of a worst case outcome? A client of mine loved gambling and scored in the top 5% of his psychometric test. But his ARF was the only money he had to live on, it had to do him for the rest of his life. He simply couldn’t afford to take my risk with his ARF as his lifestyle would be seriously altered if the fund value fell drastically.
Trade-Off Decisions – After working with people on the returns required to match their goal, we can assess whether their goals are achievable with taking the level of risk they are comfortable with. If not, they can lower their expectations, increase risk or put in more money. This way, people can make informed decisions at the beginning of the investment.
Investment Process Step 3 – Investment Policy Statement
The final step in the investment process is the production of an Investment Policy Statement, laying out how the investment process works:
Diversified investment portfolio designed to match your risk profile, with an emphasis on asset allocation.
Details on rebalancing. If there is movement of the asset allocation of more than 3% in a year, your portfolio is reset back to the original asset allocation. This reduces the volatility you are exposed to and you also sell high and buy low.
Details on time horizons, risk profiles and expectations
Historical returns so you can see how similar portfolios have performed in the past.
Investing isn’t an exact science and guarantees cannot be given on what returns you will get. But by following investment processes, you can help people to manage their expectations and invest in assets so they won’t have sleepless nights worrying about their money.