Educating clients on some of the basics of financial planning and investing can be both frustrating and rewarding. Many folks want to learn about these things and understand the importance of knowledge in building their financial future and protecting against mistakes and the markets. Of course, one of the first lessons they should learn is that an investor can only do so much to protect against the vicissitudes of the markets. Keeping the natural instincts of fear and greed under control can do much here, but is not always enough.
A frustrating aspect in some investors is the tendency to ignore advice and to assume greater knowledge than anyone else. For example, one family we’ve worked with follows the creed that ownership of real property is the central piece of their finances and that the equity markets should be avoided entirely. Although that might work some of the time, this family has seen significant erosion of their wealth due to ongoing property costs together with changes in demand for different types of property. In addition, they’ve missed out on some tremendous investment opportunities in the markets even avoiding lower risk plain vanilla index funds and the like. The attempts to teach this family the value of diversifying investments has not been wholly successful.
Another example is the investor concerned about investment risk who seeks certainty at any cost. Here we see funds languishing in certificates of deposit earning interest that does not even keep up with the low inflation rates we presently enjoy. Alternatively, such an investor finds the bells and whistles of an indexed annuity’s guaranteed floor enticing, forgetting that the cap on the growth of that annuity (given in exchange for the protection against loss) means that most of the growth in the investment will redound to the benefit of the insurance company and not the investor. Once again, fear of the markets and of loss results in a different kind of loss which could be mitigated by sensibly diversifying investments.
Working with clients to show them the hidden costs of their behavior can help them to achieve much more with their finances once those constraints are reduced. A professional advisor can be a great help to such investors, but take care in making your selection of an advisor.