Proactive investors will find much food for thought in this interview, where one top wealth executive reveals their top “money lessons learned” to findaWEALTHMANAGER.com.
John Howard-Smith has been Chief Executive of Psigma Investment Management since 2002, having previously held senior roles at HSBC Investment Management and Credit Suisse. With 30 years of industry experience, Howard-Smith has both pragmatic and more philosophical money lessons to convey to users of findaWEALTHMANAGER.com.
Buy low; sell high
While “buy low; sell high” might be the very simplest of investment tenets, it is nonetheless one of the most difficult for investors to hold to, in Howard-Smith’s view. All too often, investors allow the dual forces of fear and greed to dictate their actions – with deleterious results.
In his view, one of the most important roles played by the trusted advisor is to coach investors through short-term volatility and encourage them to stick to a long-term investment strategy without panicking. He observes:
Without proper guidance you often see investors wanting to do very counter-intuitive things. Having initially invested £1m they then might see that six months later markets have fallen so that their portfolio is worth £900,000 and they rush to liquidate their portfolio and so realise a £100,000 loss. Then, when everything recovers and they see markets 20% higher they think ‘I’ll put my money back in’.
It’s so important for us to remind clients who are unused to volatility to remember that the reason they invested was for the longer term and they shouldn’t be panicked out of the market. If you have a 7- or 10-year time horizon, you shouldn’t be thinking ‘this is terrible; I should give up on this’ if things haven’t gone as well as they might have done six months in.
Never underestimate how inflation can erode wealth
While Howard-Smith applauds recent moves to embed financial literacy in the UK school curriculum, he sees a deplorable lack of focus on one of the biggest threats to wealth of all: inflation. Having had sight of some of the introductory materials typically used in schools today, he observes that the avoidance of investment risk seems to be the dominant message. This, alongside the notion that the “safest” thing is to put one’s money in the bank, could promote a very damaging mind set. He warns:
Inflation really is the bit that’s missing in the education piece. Inflation hasn’t really been an issue for the last 20 years and so we have a whole generation who haven’t really experienced it. They just aren’t aware of how much of a risk it poses if unaddressed.
If you find an individual in their 30s and 40s who has sold a business for £10m thinking ‘I’ve got plenty of money; I don’t need to invest and I’ll just leave it in the bank’, we then simply ‘do the maths’ to show them if we go through a similar period of inflation that we have experienced over the last 45 years, then by the time they are in their 80s the effect of inflation will have reduced the real value of that lump sum to just half a million pounds – just at the time when they might need to pay very hefty care fees.
Without taking action against inflation it is possible to retire as a very well-off person at 50 and to sadly end up a pauper at 90.
Think income, not just capital growth
While seeing your portfolio grow in value is doubtlessly one of the great rewards of investing, Howard-Smith believes that far more emphasis needs to be placed on income generation – particularly given the new pension freedoms that have been introduced in the UK.
Income is probably the most important thing for the majority of investors, but gets largely ignored. For many the question is not, ‘What is the capital value of my investments?’ but rather, ‘What income can my investments provide me with?’
One client really brought this home to me after the 1987 crash. She’d read the headlines about billions being wiped off the stock markets but said, ‘I’m not really so concerned about the value of my portfolio; it’s more whether my £300 a month income is safe’ – since that’s what she was living on.
It clearly depends on what you are investing for, but for most people retirement is the end-game. Therefore, what is most important to them is how much money their investments will generate in order to maintain their lifestyle. Protecting the purchasing power of money to fund what might be a very long retirement is a big theme in our conversations with clients.
“You can’t eat relative performance”
Fund investors will naturally keep a close eye on performance rankings to help them assess which are the best buys. Yet how funds are performing relative to each other is only one metric to be taken into consideration – and possibly one that isn’t all that meaningful – Howard-Smith notes:
I recall one occasion very early in my career when I had bought some units in what was the top-performing smaller companies fund that year and it lost money. When I said to the client that it had been the best performer in its sector, he simply retorted, ‘I can’t eat relative performance’. That comment has never left me.
Relative performance is important and can be a useful benchmark in helping clients make decisions, but it’s whether you’ve lost or gained in absolute terms that’s the key – hence our focus on absolute returns as a house.
It’s no use to an investor when their manager says, ‘I’ve lost you 20% of your money, but if you’d been with the competition they would have lost you 25%’. Unless the MCSI is down 40% and you are all square, losses are still a difficult pill for any client to swallow.
Choose an investment manager with conviction and who will “bleed with you”
Howard-Smith’s final lesson for investors is rather more philosophical in nature: find an investment manager who is unafraid to make high-conviction calls and who will “bleed with you” should things occasionally not go to plan. In his view, some investment managers have a tendency to play far too safe, leaving clients making only lacklustre gains from their portfolios and in all likelihood jeopardising their financial goals. He says:
There are many investment managers that are so benchmark aware they think ‘If I outperform or underperform the index by 1% then my clients are not going to leave, but if I underperform by 10% while trying to outperform by 10% then I’m going to get a hard time. It can be uncomfortable being at the other end of the room, but if you are not willing to make some calls then how can you differentiate as an investment manager?
At the same time, you need someone who isn’t at all flippant about losses managing your money. Unfortunately you do sometimes find investment managers thinking that they are ‘only managing rich people’s money’. You must care, so you bleed when your clients bleed.
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Psigma Investment Management was set up in 2002 by a group of former senior banking executives wishing to deliver a more personal service to clients. Based in London, the firm is known for its emphasis on delivering risk-adjusted returns above inflation.
Find out more by visiting our full profile of the firm, or to discover which wealth managers precisely suit your needs simply try our smart online tool.