Is your Advisor Lazy?

When a weak student joins a tuition class, the teacher promises the parent that his ward will improve and while may not end up as a rank student will at the same time not fail the exams. On the other hand, when a student who is already doing well joins, the aim is to try and see if he can come in the top 10 ranks.

A lot of water has flown about whether systematic investing is good or not without there being much of a context attached to it. Any investment plan that inoculates savings is good as long as there it’s saved in asset classes that provide one with positive inflation adjusted returns over time and is not a scam (read Teak Investments / Emu, etc).

Personally, I was a believer in systematic investment planning though I haven’t invested into mutual funds. I too believed like vast majority that this is a good way to invest and grow for the long term. The biggest advantage of SIP is that it’s easy – once you sign-up, amounts will get withdrawn periodically and as the law of large numbers dictates, over time, you investment will be closer to the mean than either ends.

SIP is supposed to be done blindly, yet the same advisers who advise SIP rightly advise that picking the right plan is paramount as well. This though creates a dilemma given the large number of funds that we have – which funds are good and which aren’t?

To solve that dilemma, let’s assume we hire an advisor who knows better than me (after all, if he is as clueless as me, what’s the whole point in paying him) and who can guide me better.

Most advisers seem to stick with funds that come from large houses (HDFC / ICICI / Franklin) given that they have showcased good return over time. But does historical return itself is enough to judge whether a fund is worth investing into?

As on date, there are around 130+ large cap funds. An adviser who manages 100+ Crore of investor funds some time back tweeted that the length of any SIP has to be at the minimum the length of a business cycle – 8 years.

Let’s assume that the advisor has a list of 3 funds which he believes you should invest into. It’s all Good, Right?

The biggest disadvantage of SIP is that it forces you to invest into expensive markets as well as cheap markets. Now, while markets do not remain cheap or expensive for too long, they do enough times over time.

For an investor who has been goaded to invest with the hope of good returns over time, deep draw-downs are killing. After all, you are supposedly saving a goal – Retirement / Child’s Education and here you have a statement telling you that after saving for X years, current value is lower than what you invested in first place.

No wonder it is that most people stop SIP at the lows of the market as the pain of looking at the loss and adding to it (in their view) becomes too unbearable.

I can understand a Do it yourself investor doing such a fuck-up. But once you go through an adviser, isn’t he supposed to be there to help you. I am not speaking about the supposed hand holding they claim but in terms of real valuable advice?

IDFC Mutual Fund has brought a nice graphical ad of how to lose money in markets – easy, Buy when markets are expensive. But how many advisers advise an investor to save into debt funds and shift (while adding more) once markets go cheap?

Mid cap stocks have had a great run in recent months, but do you know that its valuation a couple of months back was at a never before seen high. Yet, money has flown like never before as investors latch on to the hot hand fallacy.

If you are investing into mid-cap funds using SIP or lump sum, do you know the probability wherein 5 years down the lane, you could still be underwater?

Some time back, I had worked on future returns based on current price earnings ratio of the index. Reproducing the same one again, its clear as to how great returns can be achieved by buying cheap.

 

To me, an advisor who advises SIP (in Equity) for everyone and more importantly all the time is a lazy advisor and will get you returns that are average or below. If you are a weak student, yes, you shall pass. But if you were a student who was already scoring A’s, do you really want to be given a prize for getting a C?

Ecclesiastes 3:1–8 is a well-known passage that deals with the balanced, cyclical nature of life and says that there is a proper time for everything:

 “There is a time for everything,

and a season for every activity under the heavens:

a time to be born and a time to die,

a time to plant and a time to uproot,

a time to kill and a time to heal,

a time to tear down and a time to build,

a time to weep and a time to laugh,

a time to mourn and a time to dance,

a time to scatter stones and a time to gather them,

a time to embrace and a time to refrain from embracing,

a time to search and a time to give up,

a time to keep and a time to throw away,

a time to tear and a time to mend,

a time to be silent and a time to speak,

a time to love and a time to hate,

a time for war and a time for peace.”

For a longer list of what should you NOT expect from an advisor, do read this post by Yamini Sood (Link). In addition, I would suggest reading of the transcript of a speech delivered by Jason Zweig (Link).

As Lou Holtz once said, “Virtually nothing is impossible in this world if you just put your mind to it and maintain a positive attitude.”

Let me conclude this post by quoting a passage from the book, Investing with the Trend by Gregory L. Morris (Book Link)

My decades of experience have taught me that there are times when one should not participate in the markets and are much better off preserving capital because bear markets can set you back for a long time, and they are especially bad when they happen in your later years. Keep in mind that the closer you get to actually needing your serious money for retirement, the worse the effect of a severe bear market can have on your assets. It is critical to understand the concept of avoiding the bad markets and participating in the good ones. It is never too late to invest intelligently for your future.