Trust the financial adviser who trusts the market

With around 43,000 qualified financial advisors in the UK, how can you feel confident that you’ve picked the right one?

My video on the 10 qualities of great financial advisers is a good starting point. But there’s more to consider, especially when it comes to investment philosophies.

Here are a few more things to think about if you want to make sure you’ve made the right choice of financial adviser to guide you through your retirement.

First, eliminate the stock pickers & market timers

Those are the people making predictions about which stocks are going to be winners and losers. Cross off the market timers, too. They’re the ones who get into and out of the market, trying to buy the dip and sell at the peak. The problem with these strategies is that it’s unlikely any individual will be able to pick the right stock and the right time - especially more than once. Over 50 years of research confirms that people can neither pick stocks nor time markets consistently year after year.

As I always say, the smartest person on the planet isn’t as smart as the market. Markets are much smarter than advisers and smarter than I am too.

But why is that? Markets do a sensible job for sensible reasons. Buyers and sellers have to come together to make a trade. Prices have to be low enough to attract new investors and high enough to entice someone to sell. Both sides have to feel good, or they don’t make the trade.

That’s why you should trust the financial advisor who trusts the market

These are people who help investors try to capture the returns of the market rather than attempting to outsmart it. Decades of research supports this strategy. So does the explosive growth of index funds.  MFP Wealth Management and our investment philosophy is based on additional research that has provided insights into how to pursue higher expected returns than index funds offer. But all these strategies are based on the commonsense idea that markets do a good job of incorporating information into prices. We see that every time a big piece of financial news sends stocks up or down.

Think of the market as a giant information processing machine. Prices change as millions of buyers and sellers react to new information coming into the market. Prices settle at “fair” values that seems reasonable to both the buyer and the seller. This should be reassuring to you and give you the confidence to trust the market rather than to fight it. 

Historically stocks have returned about 10% per year.  That’s about 7% above the average rate of inflation and 6% above what people think of as riskless assets like money market funds. Naturally there are variations, and there is no guarantee, but I think these are generally reasonable returns to buyers of shares in a company. Shares in the Great Companies of the World, as I like to call them. Markets seem to operate the way people hope, which gives us a fair chance of winning. 

If markets work, isn’t investing straightforward?

What’s the catch in all this? The reality is that it’s daunting to figure out what exactly to do, how to develop an investment plan. But you can’t avoid it. Few things are more important than developing a well-thought-out plan when investing your life savings (and making sure they last your lifetime).

In my experience, it’s easy to agree with these principles, but it’s hard to stick with them when times get tough. You need to be a long-term investor. If you accept these fundamental principles of markets and how they work, you owe it to yourself to find an adviser who does too. So trust the adviser who trusts the market. And if you’d like a second opinion on your investment plan, book a free initial call with me.