Canny View: Transitioning to a goals-based future

The dilemma of the past is one that often confronts investors who visit an adviser for the first time. Photo / Supplied

Any successful career will at one point see a peak and then a decline.

If we take authors as an example, Truman Capote hit his peak with the release of In Cold Blood, but never finished another novel, descending into alcoholism and drug addiction.

Capote's good friend Harper Lee wrote the classic To Kill A Mockingbird, but she never published another novel (a first draft of To Kill A Mockingbird was published under another title in 2015).

Consider active investment managers. Many can be lauded for their successes and anointed as geniuses we should follow, but there's a reason for the warning that "past performance is not a reliable indicator of future success".

We recently highlighted Neil Woodford's fall from grace, but he's not the only one to lose his Midas touch. "Bond King" Bill Gross retired earlier this year after being unable to recapture past successes.

There comes a point in time when past successes become questions asking, "can I do it again?"

If you want to continue a career that's performance or production based, you'll need to perform or produce again.

For Capote and Lee, one might imagine at some stage they sat before a typewriter staring at an empty page with the spectre of previous success never far from their minds. Competing with the past is not easy. Do we really need to be concerned with the past and what is the best way of letting it go?

The dilemma of the past is one that often confronts investors who visit an adviser for the first time. Some are rounding the home straight to retirement or are almost there. While a positive step, there's the argument it should have been done earlier. Yet the biggest issue is it means a large mental adjustment. There may have been some stock picking, real estate or business success. With that previous success how can someone not allow that past success to influence what they expect from a new process?

A person who is accepting advice for the first time needs to ask themselves several questions which may help clear their mental ledger and accept advice.

Are my current investments right for me going forward?

This is a tough question and it might be an emotional one. People may be sitting on all sorts of assets for all sorts of reasons. An inherited house or shares we can't bear to part with. Other share purchases that have served us well.

Share purchases that haven't served us well. Investors will hold on to their stars and their dogs for too long for various reasons. Don't want to pay the tax, don't want to mentally accept the loss.

Nick Stewart

A large wad of cash accumulated might be more about perceived security than addressing future goals.

Sometimes there might be family entanglements that leave one party hanging on to part of an asset (usually real estate) that benefits them in no way, but they've been encouraged to hold on to it for a family member who is deriving a benefit from their inaction.

Does my investment history have any relation to my investment future?

Everyone invests with the intention of success, that's a given. Not everyone invests with a purpose tied back to their needs.

Investing can often be linked back to three areas – goals, self-expression and ego. Women generally invest for the first one, while men can find themselves clouded by the second two. It's men who need to ask this question more than women.

This often confronts self-directed investors who've been stock picking. Quite often their investment process hasn't considered the risks they've taken, but they've had some good payoffs.

While that's a success, it's not a practice that should be continued into retirement. Their mindset needs to switch from the payoff mentality to consider how an investment will serve their needs.

Appreciate past winners, but understand they have little relation to the future when the focus switches to something goals-based.

Removing self-expression and ego from the investment process to solely focus on goals is important. A good adviser will be building a portfolio around goals.

Were my mental returns my actual returns?

Unless they have a robust reporting system in place, investors can fall into the trap of mentally minimising costs, ignoring taxes or only considering the returns from one part of their portfolio. This leaves them with the belief they've done much better than they have.

This year an investor came to see us about their portfolio, wanting our opinion. It comprised nearly 20 companies on the ASX and seemed to be constructed haphazardly but had done quite well. As best we could calculate, it had a per annum return of 10.35 per cent over the past decade – fantastic!

However, that wasn't their whole portfolio. They also had nearly as much money sitting in cash for market timing opportunities they never took.

When factored in, it dragged their return down to 6.23 per cent pa. A better diversified 60/40 portfolio delivered more than 9 per cent per annum over the same period.

Will I be comparing myself to others?

This one's not so much about the past as much as being able to keep a clear mind for the future. People talk.

They talk about investing. While they'll leave out sums of money, they will talk about gains and costs.

If you're listening to someone talk about their gains or how little they seem to be paying in comparison to you, it can be unnerving. You might question your own strategy.

Remember the last couple of questions. Two primary reasons why people invest – ego and self-expression. If someone feels they're doing well, they're going to tell you about it. Also remember how quickly that 10.35 per cent return became 6.23 per cent when everything was considered. We don't get to see anyone else's statements, only the highlight reel they give us.

"The big question about how people behave," says Warren Buffett, "is whether they've got an inner scorecard or an outer scorecard. It helps if you can be satisfied with an inner scorecard." Investors shouldn't let anything beyond their own goals drive their behaviour and decisions.

The past isn't important, and neither are any external influences. What matters are an investor's individual or family goals and the strategies put in place to reach them.

Nick Stewart is an Authorised Financial Adviser, trustee and CEO at Stewart Group – a Hawke's Bay-based CEFEX certified financial planning and advisory firm. Stewart Group provides personal fiduciary services, Wealth Management, Risk Insurance & KiwiSaver solutions.

The information provided, or any opinions expressed in this article, are of a general nature only and should not be construed or relied on as a recommendation to invest in a financial product or class of financial products. You should seek financial advice specific to your circumstances from an Authorised Financial Adviser before making any financial decisions. A disclosure statement can be obtained free of charge by calling 0800 878 961 or visit our website, www.stewartgroup.co.nz