It’s always time to focus on strategy

‘I feel sorry for those who were about to retire.’ This is a comment I hear almost on a daily basis in the context of the global financial crisis (GFC). My reply is that they must have found financial advice too expensive.

We have all heard the latest preachers of strategy, but when it comes down to the crunch, that is all we have. We are advisers of strategy, it just happens that our main tools are usually product based.

But it is strategy that will allow those who were about to retire before this so-called crisis to proceed. What cost can you place on being forced to continue to work when you planned to retire? Or worse, being forced from retirement back into the workforce?

We cannot schedule all transactions to occur at the best possible point of the market and our strategies must not rely on that timing. We all know this, but do we adhere to our faith?

If indeed, as we have heard repeatedly from exceptional investors, ‘you could see it coming’, I ask why nobody, or at least the vast majority, did anything?

The answer is no one really ever sees it coming in magnitude or precise timing. Large market fluctuations like the past year are repeats of market history. If something occurs repeatedly, you should consider it normal.

Economists and the media brand these events well after they have begun. Booms are normal and crashes are normal, yet we never seem to label a boom until it crashes and we never consider booms normal. We appear quick to brand a crash at the first sign of weakness, and consider it a disaster.

I for one could not see this last boom coming and consequently did nothing. I also could not see the recent bust coming and intend to do nothing as recovery comes. We must set a portfolio up for normality; it is the strategy that manages this normality. Normality is prosperity with the intermittent short-term moderate gains or, indeed, set backs. Normal is not simply rising investments. We all know this.

For those who wish to time transactions in these markets, this must be terribly worrying. However, prices are simply what someone else is prepared to pay for investments now. It is very much correlated to short-term emotions — fear and greed — not longer term value.

Strategy not only manages excess decline (fear), it must be used to manage excess growth (greed or the fear of missing out). The decision to do this requires exceptional discipline, possibly more so than in a declining market. This is the stage where the strength of strategy is paramount to managing a future guaranteed decline (be assured this will happen again, it will just be branded with a different name).

A brief look at the last 50 years will plainly show a strong trend of increasing value for those with a longer-term plan. It will also show a regular price wobble, to both extremes, not even remotely related to long-term value.

Strategy is the most valuable advice I can give my clients. In good times this is less apparent, although in my view this is the exact time when solid strategy and disciplined adherence is exercised for the bad times. Managing emotions such as fear and greed becomes much more achievable if we can rely on the strategy we have in place. It reduces risk for our clients and reduces risk to our businesses.

I believe clients should have been able to retire in the face of the GFC. If the strategy is not strong, heaven help those as we face the next crash! Retirement is not, and should not, be correlated with the cycle of the investment markets.

The focus on financial planning from most of the outsiders who offer comment on our industry is almost entirely on product. We as an industry need to assist the regulators, commentators and our clients to move away from this product focus. Product is simply one of the tools we use to implement strategy.

There will always be a new financially engineered product that appeals to current emotions (be it fear or greed), it will be complex and appear brilliant — labelled a ‘must have’ that is specially designed to prosper. These phrases have been thrown around during both booms and busts for as long as I can remember. Time and again nothing has changed, and it is not likely to. Investment markets remain in the long-term phase of normal.

Nick Blomfield is a financial adviser at Fiducian Financial Services.