The greatest possible pitfalls in investment planning

Patrick Barker, Private Client Portfolio Manager at Cannon Asset Managers, identifies what he believes may be the biggest hindering factors in investment planning.

investment planningInvestors need to think in terms of taking responsibility for their investments, rather than being “victims” of their investment circumstances.

The term “victim” is used in many instances and in the financial world we hear of victims of investment schemes, victims of inflation, victims of poor planning and so on. But what if the word victim did not exist and the notion and culture of being a victim disappeared? If we are not a victim of something, we must take responsibility for it. While this may seem challenging, it is also highly empowering.

When approaching investment planning, we need to do so by assuming complete responsibility for our decisions and accepting the outcomes. To achieve this, we must do enough homework to make informed decisions. And for that, we often approach professionals in the investment industry. They may become accountable for their advice but the responsibility of our decisions still remains ours: ownership of our decisions gives us power over them.

If we were to hand over full responsibility to an investment professional, we should not allow ourselves to feel disillusioned if we are not satisfied with the results. After all, we would have abdicated responsibility.

Even if we have a completely non-financial background, or simply believe that we are not financially minded, this does not mean that we cannot learn. We can do anything if we set a goal and then apply our minds.

Fear of failure

In most cases, it is the fear of failing that drives us from taking responsibility. However, given that our greatest growth occurs when we are most challenged, such as in an accident, perhaps the word should be acci – meant!

Neuro and behavioural scientists have put forward the following model to explain the process we follow when making a decision:


Our perceptions are built from a young age, when we develop our belief systems. Thinking according to that belief system, in turn, generates an emotion and then a feeling, which results in action. Much of our general thought patterns, including those about money, hinge around fear about the future and guilt about the past. Clearly, our perceptions are the driver behind our ultimate actions. In the investment context, we often find out through experience what those perceptions are which is where the investment professional’s role is so important.

So, what is the ideal way to approach our investment decision-making process?

The role of the investment professional

Consult with an investment professional and ask them to educate and feed you with information continually. Approach the relationship as a partnership. Define the boundaries, clearly identifying who is responsible for what and where the accountability lies. Accountability requires that the investment professionals disclose their level of knowledge and expertise. If they are trying to box above their weight, it is usually in the interests of attracting more business.

In addition, the investment professional must remain up-to-date in their knowledge, through ongoing education. It is also their responsibility to provide investors with enough information to make their decisions and to exercise patience in answering investors’ questions. If the above does not happen, we should either inform them of our dissatisfaction and ask for more information, or move on until we find someone who will be accountable and patient.

By following these steps, we have a better chance of attracting the genuine planner who is willing to give us time, in the interests of a long-term relationship. But be prepared to pay an investment professional of this calibre as a fair exchange of energy.

Once the relationship terms have been agreed, understand that emotion is going to play a large part in decision-making. This might seem fairly logical, but the influence of emotion in decision-making is an understated aspect of long-term investment planning. By being attached to our emotions and resultant feelings, we may make decisions that affect our outcomes unnecessarily. This leads to common behavioural reactions such as the herd instinct and a tendency to sell low and buy high.

Assess your needs

The ideal way to invest is to establish one’s needs in terms of a return, given assets and liabilities; compare the needs with actual risk tolerance; invest according to an asset allocation to accommodate those needs; and re-balance regularly. This will mean buying more of the lesser-performing assets and selling some of the better-performing assets. For most, this is emotionally difficult to do, as the herd usually goes the other way and it can be really hard to move away from the herd. And be aware: this herd instinct is not only seen in investors but also in investment professionals.

Although the responsibility still lies with the investor, the relationship we develop with our chosen professional will help guide us through the emotional patches. In most cases that investment professional will be there to help keep us on track towards our ultimate goal. This will require helping us to manage our emotions at times when we act in conflict with our agreed risk profile and asset allocation.

As investors, we need to be mindful that not only are our emotions affecting the decisions we make but so are the emotions of the people through whom we invest money or who do our planning. We do need to question that possibility with them by asking what they do to avoid being affected by their emotions. Once satisfied by their answer, that professional becomes our emotional gatekeeper but they should never take on the responsibility for our decisions.

If they make elaborate promises or are willing to take on our responsibility, we should be very careful of the possibility that this person may be over-promising. And the only outcome of that is under-delivery. Alternatively, they could be putting their financial interest ahead of ours.

In summary, the biggest pitfalls that an investor can face are:

  • Failing to take responsibility for their own investment decisions
  • Choosing the wrong investment professional; and
  • Allowing emotions into the decision-making process

Ultimately the responsibility lies with the investor. Accountability lies with the investment professional. But the partnership developed, must surely be healthier for all parties.

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