July 11, 2016

There are so many factors involved in achieving your financial objectives.  Net returns, or course, and all of the factors underlying that:  asset allocation, diversification, low correlation, etc.  But the one thing that is absolutely the sine qua non when it comes to achieving your financial goals, is discipline.  For most, without it you cannot accumulate the capital that you will need, nor will you be able to successfully invest that capital.  It is a simple reality, but a very difficult thing to put into actual practice.  Why?  Because it flies in the face of “human nature.”  I am sure that many of you have seen the now iconic Warren Buffett quote “be fearful when others are greedy and greedy when others are fearful.”  Is following that mantra an easy thing to do?  Not for most of us.  It takes a great deal of discipline.

I have always felt that advised investors are much more likely to weather market downturns than un-advised ones.  To be honest with you, I am tiring of media harping about all of this, and how useless advice is, how it is a much more intelligent choice to “do it yourself”, and so forth.  So in that vein, I wanted to tell you about a research study that I came across.  It was done by Winchester, Huston and Finke and entitled Investor Prudence and the Role of Financial Advice.  It was published in the Journal of Financial Service Professionals in July, 201l, just a short time after the end of the “Great Recession.”  As we all know, during that global financial crisis that began in 2007, many investors lost a significant amount of wealth as a result of impulsive investment decisions.

Winchester et al examined whether investors with financial advisors are more likely to maintain long-term investment objectives during severe market declines than are those investors who do not rely on financial advisors.  In their study, the authors define “investor prudence” as an investor’s tendency to maintain investment decisions in the present that support their longer-term goals.

In other words, staying the course even in the most unfavourable environments.  The study models investor prudence as being positively influenced by financial advice, as well as the investor’s level of knowledge and discipline.  One of the important factors in developing discipline, they say, is having a written, customized financial plan.

The authors also measure investor prudence by evaluating whether investors re-balanced their portfolios during the last market downturn.  In the authors’ view, the two most important components of investor prudence were having a written financial plan and having purchased financial advice.  More specifically, they concluded that:

• an individual with a written and customized financial plan is almost twice as likely to re-balance during a bear market than an investor with no written plan, and

• investors who purchase financial advice are more than one-and-a- half times more likely to maintain a long-term investment strategy compared to investors who do not purchase advice.

The point of all of this is that there is a growing body of very sophisticated research, not only from Canada but many other countries as well, which points to the clear benefits and value of obtaining financial advice.  If there is a single takeaway from this, in my view it is one word:  discipline.  Without discipline in saving, planning and investing, achieving financial independence can be very difficult, if not impossible.  And, like anything in life where discipline is needed, it’s a lot easier to have some help and support rather than trying to go it alone and do it yourself.
Howard Goodman
President, HG Partners Limited
Director, Private Client Group &
Senior Financial Advisor,
HollisWealth Advisory Services Inc.

This article was prepared solely by Howard Goodman who is a registered representative of HollisWealth Advisory Services Inc. (a member of the Mutual Fund Dealers Association of Canada and the MFDA Investor Protection Corporation).  The views and opinions, including any recommendations, expressed in this article are those of Howard Goodman alone and they are not those of HollisWealth Advisory Services Inc.

HollisWealth is a trade name of HollisWealth Advisory Services Inc. ® Registered trademark of The Bank of Nova Scotia, used under license.

HG Partners Limited is an independent company. Scotiabank companies have no liability for activities outside of HollisWealth.