Fever tale may have chilling end

Inoculating clients against speculation fever may be a financial planner’s most valuable service right now. It’s not that often I get a sign directly from heaven, so when it happens I really pay attention.

Just the other day, I was at an industry lunch when the young chap sitting next to me informed me that the strong equity market would go on for a long time yet and there were great opportunities in small-cap stocks.

Like most of us, I have been exposed to many of the signs of speculative excess that seems to be all around us these days – the Asian crisis, Internet trading, information overload, the young man who made his fortune on high tech stocks overnight.

However, somehow those things hadn’t touched me in quite the same way as the excited young man’s aggressive view on the future and, more importantly, somebody else’s money that may double over the next twelve months or, alternatively, halve.

I think the difference is that I have been in the investment business for about twenty years and may be watching the third epic speculative blowoff (although the only one in my career). The great, and terrible, thing about having a long career in the investment business is that, no matter what’s going on at the moment, you’ve seen the movie before. And you have a pretty good idea how (though no idea when) it ends.

In the case of two other speculative blowoffs in 1968 and 1987 the movie ended very badly.

When we who are cursed with a memory, or an adult sense of danger, mention this to today’s new breed of market maniacs they often serenade us with the great four word death song: “This time it’s different”.

Nick Murray, a long time financial services commentator, has developed a program to help financial planners and private bankers understand their clients better.

Financial planners are always fighting one or another external excess on their client’s behalf.

Because we know that people fear loss more than they do gain, it becomes the job of those of us who have experienced the pain to correct the young about their misconceptions and protect those investors who trust in our industry for guidance.

This eight part checklist can help people move down from the ledge.

1. Never lose sight of how exciting markets like this can be, but stop and make good sense of what is happening, make calculated decisions and understand the risk.

2. Review your goals and plans on a more regular basis. Remember you can not out perform the market every year. You need to focus on life, not markets, and goals not investments.

3. Review your portfolio and its mix more often in a market like this. Go back over why you own what you own and ensure your asset allocation is correct, remembering that equity diversification is a great lifetime investment – not a bet on whether red or black come up.

4. Put performance into perspective and remember that the higher the returns you’re seeking, the higher the risk and volatility of your portfolio. Remember also that with peak performance comes peak volatility.

5. We always need to remember that portfolio turnover correlates negatively with returns. The more you change or trade your portfolio the worse you can do.

6. Get advice from quality people who care about you and your future and be sure that they have the technical resources behind them to be able to manage your affairs through the good and bad times.

7. The lessons for investing in the 21st century have been learnt from the past. The 20th century has seen many profound changes in investment markets: the relative decline of agriculture and manufacturing, the rapid growth of services industries, a big increase in average incomes in Australia, the industrialisation of Asia, two world wars, the rise and demise of the cold war, technology, travel, globalisation, the political and economic leadership of the United States, the rapid growth of superannuation funds, the spread of direct ownership of shares, capital gains tax, dividend imputation, the changes in the role of gold and the raft of legislation and regulations covering corporate law and security markets. This is, of course, only a brief list of what has changed.

8. There will be many further changes – a lot of them unpredictable – in the economy and investment markets over the 21st century. Nonetheless, the lessons learned in the 20th century will remain highly relevant for successful investment in the new century. In particular, investors should continue to focus on:

• the benefits of investing for the medium term and the longer term;

• the better performance, over time, from growth assets such as shares and equity funds relative to investment in cash, bonds or bank deposits;

• the case for occasionally trying some counter-cyclical investments;

• the need for careful selection of shares – a task which some investors will entrust to a good fund manager, at least for a part of their investment.

In investment, as in many other parts of our lives, the old saying is still appropriate. The more things change the more they stay the same.

In today’s environment you have the chance to get the best advice – take it. It’s too late to do a lifeboat drill when the water is up to the chandelier in the grand ballroom. This time if won’t be different – it is never different.

As Harry Truman said: “The only thing new in the world is the history that you do not know”.