Work With a Financial Adviser Who Believes in the Markets
How do you choose who to work with among over 25,000 financial advisers in the United Kingdom?
First, get rid of the stock pickers. These are the people who make predictions about which stocks will be winners and losers. Remove the market timers as well. They are the ones who constantly tinker with an investment portfolio, entering and exiting the market, hoping to buy at a low and sell at a high.
The problem with these strategies is that it is unlikely that any individual will be able to select the right stock at time - especially more than once. Over 50 years of research confirms that people cannot consistently pick stocks or time markets. The market, eventually, is smarter than the smartest person in the room.
Why is this the case?
Stock markets function rationally for rational reasons. To make a trade, buyers and sellers must come together. Prices must be low enough to entice new investors while also being high enough to entice someone to sell. The trade cannot be completed unless both parties are satisfied.
That is why you should put your trust in a financial adviser who believes in the market.
These are the people who assist investors in attempting to capture the stock market's returns, rather than speculating in an attempt to outsmart it. This strategy is supported by decades of research too, and all of these strategies are based on the common sense notion that markets do an excellent job of incorporating information into prices.
We see this every time a major piece of financial news causes stocks to rise or fall.
Consider the stock market to be a massive information processing machine. Prices fluctuate as millions of buyers and sellers react to new information. Prices eventually settle at "fair" values that appear reasonable to both the buyer and seller. This should reassure people and give them the confidence to trust - rather than fight - the market.
Stocks have historically returned around 10% per year. This is roughly 7% above the trendline long-term rate of inflation. Naturally, there is volatility along the way, but I believe these are generally reasonable returns that can be expected by shareholders in a diversified portfolio of stocks in some of the greatest companies in the world.
If history is our guide, and its the only guide we have, then stock markets appear to function as expected, giving us a reasonable chance of success.
What's the snag in all of this?
It's difficult to know what to do or how to create an investment strategy. However, when it comes to investing your life savings, few things are more important than developing a well-thought-out financial plan.
And although it's easy for a reasonable person to agree with these principles, it's difficult to stick to them when times get tough. You need to be a long-term investor.
If you accept these fundamental market principles and how they operate, you owe it to yourself to find a financial adviser who does as well. So put your trust in the adviser who believes in the market.
Amyr Rocha Lima, CFP® is a financial planner who specialises in working with successful professionals age 50+ to help them reduce taxes, invest smarter and retire on their terms.
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