One of the great things about being a financial planner and member of the IFP is that I get to hear a lot of really good talks from very well informed people. Last night’s local London IFP branch was no exception. The topic was behavioural finance from a leading author and speaker on the topic, Greg B Davies. I won’t be able to any justice to the content of his talk in a few words, but he played some “behavioural theory” mind games with us – helping us to see the different ways in which people perceive risk and the behaviours that they adopt. Importantly, he suggested that how questions are “framed” can manipulate behaviour, which is something that every impartial financial planner needs to be aware of.

Whilst there are many exceptions, Greg was very clear that solid psychometric testing for risk is the logical and most preferred way to asses your attitude to risk – in essence a ringing endorsement of our approach and use of FinaMetrica risk profiling with clients. However, this is part of the story and as an adviser, I need to be mindful of the reluctance of clients (investors) to realise a loss – even though it may be sensible, logical and beneficial, realising a loss is something that as humans, we struggle to do. As many others before him have suggested, to be good investors we need to remove emotion from our decision making. However, he recognised that this is not an easy discipline, we can have very good and rational reasons for “selling at the bottom”, although such a decision will not serve us well in the long-term.

Greg warned of the problems of short-term thinking and investment strategies focused on the short-term. We need to be mindful of the fact that in general, we as humans tend to dislike losing money twice as much as we like making money. He also argued that whilst there are flaws in Modern Portfolio Theory, it is currently the best model that we have to help investors achieve an appropriate balance between risk and returns. Greg reminded me that perhaps the most important role a financial planner plays is helping clients reduce the number of mistakes that they would otherwise make. He reminded us of the image of Odysseus, (Greek version of Ulysses) who knowing that he was going to be lured by Sirens, bound himself to the mast of this ship, and stopped the ears of his crew with wax so that they would not hear. A familiar story, but what I hadn’t reflected on before was the practical limitations that running a ship whilst being tied to the mast, providing direction to people that cannot hear. This (discomfort) was the “price that needed to be paid” to avoid the limitations human nature (to succumb). So as markets remain “nervous” remember the long-term perspective, stick to your goals, and take heed of Odysseus who was thoughtful enough to defend himself from himself.

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