A Simple Lesson From Bradley Nuttall on How to Avoid Financial Ruin

Of course, we'd argue that the more an investment adviser tries to appeal to your trust using pictures of active seniors strolling on the beach, the more sceptical you should be of their advice. 

A behaviour gap is the difference between what we know and what we do. For example, we could know that exercise is good for us. We could look at the scores of academic journal articles that potently demonstrate the link between co-morbidity, survival, and exercise. However, many of us go home at the end of the day, sit on the couch and eat potato crisps before heading off to bed.

That's a behaviour gap... and investing is full of them. The core concept is that what you feel like doing is often the exact opposite of what you should be doing.

Think for a moment. Good investing means:

1. Resisting the urge to spend, and saving instead,
2. Resisting the urge to sell in a panic during down periods,
3. Resisting the urge to buy euphorically during good periods,
4. Resisting the urge to chase the hot investments that have done well recently, and
5. Resisting the urge to believe that anyone knows more than everyone.

Why resist? For one simple reason, resisting, on average, means you'll enjoy much higher returns and financial comforts. But most don't resist, which is why many studies have shown that investors do much worse than investments. (For a good example see Dalbar.com)

Unfortunately, for every urge we recommend investors resist there are many con-men out there encouraging you to do the opposite via their glossy brochures. There's a lot of money to be made in "junk-food" just like there's a lot of money to be made in "junk-advice".

We know of one really good way to counteract our tendency to follow this junk-advice... education. The more investors understand about markets, and the more they understand meaningful academic publications, the better off they'll be. However, those studies can be complex and boring to read and understand.

So instead we'll try a different approach to education... we'll use some very intuitive and clever sketches by Carl Richards from behaviorgap.com to educate you on how Bradley Nuttall helps investors help themselves.

In summary, the topics we cover here are:

1. Low management fees are better than high management fees,
2. Avoid all conflict of interest,
3. Diversify your investments,
4. Understand that return is based on risk,
5. Invest when you have money and sell when you need money,
6. Rebalance to avoid buying high and selling low,
7. Invest in markets not recent winners, and
8. Invest for the long-term.

Low management fees are better than high management fees

The less money you pay in management fees, the greater your investment returns.

Let's demonstrate this graphically.

Nevertheless, investors purchase expensive investment products all the time, hoping by chance that they've hooked into the next big winner.

This is a bad approach to investing.

Morningstar Director of Mutual Fund Research Russel Kinnel observed: "In every single time period and data point tested, low-cost funds beat high-cost funds."
(Russel Kinnel. "Fund Spy—How Fund Expense Ratios and Star Ratings Predict Success" Morningstar, August 9, 2010)

You may be interested to know that investments recommended by Bradley Nuttall have expense ratios less than 1/3 of the average New Zealand managed fund. (Compared in New Zealand funds using Morningstar data)

Avoid all conflicts of interest

What is a conflict of interest? In Wealth Management a conflict of interest occurs when your adviser/broker is paid by the investment they are encouraging you to purchase.

• Where is the broker's loyalty? Is it to the source of their income, the product, or to the investor sitting across the table? Remember they are a "broker" simply paid to bring buyers and sellers together.
• Did the broker select that product/investment because it was in the investor's best interest or because the product paid them handsomely to sell it?
• Is there a no-commission and lower-fee investment that would be better for the investor that wasn't considered because it doesn't bay big commissions?

Brokers get around these conflicts by selecting products that have performed well recently, on the premise that the performance justifies the extra expense. Investors only too quickly learn the lesson, "Past performance does not guarantee future performance." In fact, more often than not, those good investments go bad because their great run was based on chance not skill. How much would you pay for chance?

You may be interested to know, Bradley Nuttall never accepts any fee, commission, or payment from any investment it recommends. Our total loyalty is to the client and no one and nothing else.

So look for conflicts of interest and do your research.

DiversifyYour Investments

There's an old proverb I'm sure you've heard, "Don't put all your eggs in one basket." The idea being that if the basket tips over, you won't lose your entire breakfast.

Yet many investors ignore this proverb. They invest in what's familiar and put more and more money in a few investments that have done well for them. By concentrating their portfolio in this way they take a greater risk of losing their entire breakfast.

The principle of diversification is that by holding many investments some are typically doing well to counteract others doing poorly. Thus your total investment experience is much smoother. In short, you decrease your risk while increasing your probability of reaching your financial goals.

You may be interested to know, Bradley Nuttall's portfolios are diversified across more than 8,000 underlying investments.

However, there is an element of giving up the hope of finding the next "get rich quick" investment.

The other implication of diversification is that you never grow emotionally attached to an investment. Just because an investment has done well does not mean it will continue to do so. General Motors investors learned this after 1990 and Microsoft investors after 2000.Yet millions still invest on that premise... not because it's logical but because they are emotionally attached to the investment. This leads to mistakes.

Understand that return is based on risk

Investing in what's comfortable is rarely profitable. What do we mean by "comfortable?" Comfortable investments go up at a very consistent pace and have very little risk of loss. Everyone wants these investments, so the demand for them drives down the yield investors end up with.

Very simply, the more return an investor would like in their portfolios, the greater risk (or volatility) they must be willing to accept.

Below we see a good demonstration of the volatility of different investments.

So should you own stocks (or shares), bonds, or cash? Except for a few investors, you should own all three in ratios that depend on your particular risk capacity.

You may be interested to know, that Bradley Nuttall has designed portfolios of investments at various risk levels to suit specific investor needs. To determine which is appropriate for you, take our Risk Capacity Survey.

Invest when you have money and sell when you need money

All investors have to confront investing demons. These demons (or emotions) tell them to flee markets after they’ve gone down and enter markets after they’ve gone up.

This is a horrible investing strategy, yet millions do it every year.

Simply put, investing by trying to forecast where the market is going is fraught with error. When independently measured most market pundits actually forecast markets with less than 50% accuracy (cxoadvisory.com). If the experts have so much trouble, how accurate is the average investor likely to be?

Below we illustrate the behavior of most investors.