Chameleon Advice
17 May 2019
“You make more money selling advice than following it. It’s one of the things we count on in the magazine business – along with the short memory of our readers.”
—Steve Forbes
Chameleons are well-known for their colour-changing abilities. While it’s a misconception that they do so as a form of camouflage (they change colours to match their mood or the weather), chameleons have become synonymous with change and rapid adaptation.
Investment advice certainly bears similarities to that. Investors are bombarded every day with constantly-changing advice, themes and opinions from the financial news. This advice is rarely consistent, but is in a constant period of flux, shifting and morphing to match the big stories of the day.
The recent media blow-up on the US/China trade war has unearthed articles on how to profit from the trade war. Strategies range from exposing to countries left untouched by the tariffs, to allocating to defensives, even to shorting the market. Yet, not too long ago, the investment universe was awash with ideas on how to profit from a trade deal instead. How quickly things change!
If you had acted according to that advice, there is no doubt that you would have been quickly left dumbfounded, perhaps feeling betrayed if you had lost any money as a result. Following such advice is fine, as long as you can afford to lose that amount of cash just for the sake of a short-term thrill or gamble. But it is definitely not the way to seriously invest to meet long-term goals.
We far too often risk getting suckered in by headlines touting advice on making it rich. Recent emails and pop-up notifications include: “Where to Invest Money if you had $1 million dollars“, “Exploit Short-Term Price Swings for Massive Profits” and “World’s Top Traders Use This for 10x Gains“. Be it recommendations to buy gold, Vietnamese property or paintings, there is no shortage of investment advice. Unfortunately, most of that advice is diverse, frequently changing and just plain confusing!
If making money truly was as easy as they claim, no one would be poor. Every investor would be a multi-millionaire. Instead, this confusion of advice serves only to cause decision paralysis, overwhelming investors with so many choices that they struggle to know what to do. Most of those bold claims obscure how rare successes actually are or how dependent they are on luck. They also fail to mention the risk involved.
As advisers, we often get investors asking us what they should do with their money. It would be all too easy to offer up an opinion on the market and promote a range of funds or strategies to “take advantage” of the moment. But that would be a very irresponsible thing to do. Such advice would not take into consideration the many factors that investors have to weigh when deciding to invest. Are those funds the only assets they have? When would they need the money? Do they have cash reserves? What were their experiences with past market crises? What have their experiences been with their current advisers or banks? When would they want to sell? Do their close family members know how much they are investing? Do they owe anybody money? We could go on and on, but you should get the picture by now – how you invest is dependent on your entire personal financial life, with all its specific quirks and connections.
Investors would no doubt agree that bad advice is very expensive. Larry Swedroe, chief research officer of the BAM Alliance, a community of independent advisers, tells a story in his book, Reducing the Risk of Black Swans:
Following the dot-com crash in the 2000s, Swedroe met with a 71-year-old couple who had $3M in assets. That might sound impressive, but just 3 years earlier, their portfolio had been worth $13M! The only way their portfolio could have collapsed by such a magnitude was if they had invested a significant chunk of assets in technology stocks. The painful part was that they did so only on the advice of their financial adviser. That adviser had recommended them funds that were significantly skewed towards large-cap growth stocks, which then suffered tremendous damage in the crash.
This is an example of how poor advice can end up costing a lot more than good advice. Good advice would be to diversify globally, avoid concentration and have an asset allocation according to one’s risk tolerance – something that has been talked about to death for decades. And yet, many investors fail to follow this simple formula, perhaps because they can’t find a simple and effective way to implement it or because they think investing cannot possibly be that simple.
Similarly, many people know what they should do to get fit. All it takes is regular exercise and a healthy diet. Yet there are many obstacles – both physical and behavioural – that get in the way of them turning that good advice into reality.
As another example, a study in Botswana by the Mann Global Health group showed that 91% of men and 92% of women knew that the use of a condom would help prevent the spread of HIV. In reality, only 70% and 63% actually used one. Even when their lives depended on it, their knowledge and willpower alone were insufficient to turn that good advice into practice, due to confounding factors including lack of access and personal preference.
So, at the end of the day, rather than getting lost in a morass of contradictory and ever-changing advice, stick to good advice – advice backed by verified evidence! – and the simple ways it can be implemented:
- Buy low and sell high. Everyone knows this. Unfortunately, as we cannot see the future, it can be difficult to know when the ‘low’ and ‘high’ points are. A good example was the last two weeks, where a single tweet by the US President sparked off a wave of anxiety in the previously smooth-sailing market. Implementing automated rebalancing for your portfolio can help. This keeps you constantly selling a little bit of what has gone up and buying a little bit of what has gone down. You’ll no longer need to second-guess the direction of the market.
- Save money for the long term. How many of us prefer to live in the moment? Short-term gratification can be appealing, but it often comes at the expense of your future. Put in place a savings plan that automatically deducts and invests a portion of your earnings or savings each month. You then won’t need to think about saving money – as you would have established a plan that does it automatically – and it puts you in a good place to reap the benefits in the years to come.
- Ignore the headlines. Try as we might, we are all emotional beings that get affected by things happening around us. However, if you have already established an investment plan in place that’s based on your long-term goals and focuses on the things within your control (asset allocation, goals and cost), you are less likely to be affected by the news. You would know where the finish line is, and that can motivate you to stick to your investment plan rather than get distracted by short-term volatility.
The world is continually spouting both good and bad advice. Distinguishing between them is the easy part, once you learn how. Putting that good advice into practice is what is hard, but that’s also what will ultimately pay off rich dividends in the end.
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