This week, as part of my continuing professional development, I completed an online session on behavioural finance and it made me consider the importance of emotion and behaviour when managing investment portfolios.  We have a lot of enquiries that start by saying they need to invest their cash.  We have questions from clients asking if we are going to increase our bond exposure in portfolios.  All of these questions miss the point and I think a lot of investment managers get so caught up in day to day market movements and security analysis that they forget the purpose; what is the objective?

 When you frame your decisions by looking at objectives, it can help manage those emotional biases that we all have. As mentioned above, I was asked by a client if we were going to increase our exposure to bond markets.  Whilst some bonds do look more attractive at present, it depends on what the aim of the bonds and overall portfolio is, as to whether those bonds are appropriate.  Anchoring is a strong emotion and a lot of investors believe that UK gilts provide a good hedge to risk assets. That is irrespective of the price, risk or whether they do actually still meet the objective as to why you hold gilts in the first place.  As we’ve seen this year, when the risk is interest rates, gilts are not good hedge to assets such as equity.  The gilt market is down by roughly 10% for the year to date. 

 Equity and bond markets have been difficult year to date and that often creates angst and uncertainty about putting new capital to work.  It can often be easier from an emotional perspective to reduce exposure to assets that are falling in price and move to cash.  That might be the right thing to do, if it is in-line with the objective. I would hope that most clients that are invested in markets have objectives that are in at least three to five years’ time and over that timescale, I struggle to see that cash will meet any objective apart from an emergency fund where you are comfortable to lose real wealth year on year.  Irrespective of a positive or negative economic outlook over the next three to five years, investment managers should be able to construct a portfolio of assets that provide a better probability of achieving the objective than investing even partly in cash. 

 This is why it is essential to ensure that investment management and financial planning are integrated. If there aren’t clear objectives set for investment management or financial planning, then it doesn’t matter what you are invested in.  Whilst some might disagree with me, risk management is all about meeting objectives.  If you don’t have clear objectives, how do you know how much risk to take or what to invest in?  

 If you don’t have clear objectives set at the financial planning or investment management level, please get in touch and we can talk you through how we integrate our services to provide clear and concise client goals. 

 As well as celebrating the Queen’s unbelievable 70 years of service this bank holiday weekend, we also get to celebrate Tim Kirby’s 40th birthday!  From all at WKM, enjoy your long weekend and…