On 6 October 2014 16:39, Shyam Sunder <[email protected]> wrote:
> >> Good advisors too don't know what will happen, and tend to get into the > herd mentality, the crowd, the loss aversion and all those little > behavioural biases that screw up our investments. > > This is a bit like saying "good surgeons will leave their scalpels in your > chest and stitch you up." > > You are describing terrible advisors here, not good ones. > > A good advisor should not only NOT be subject to the crowd and herd > mentality, but also help you protect yourself from these as well as the > greed vs. fear pendulum swings that cause behavioural biases. An asset > allocation driven approach to portfolio management will easily achieve this. > > "Should". But behavioural biases happen to everyone, even the best among us. I say you can't avoid it - at best, you figure out when it hits you. In the trading world, there's a whole area of psychological awareness of how to understand these biases and how they manifest in other circumstances. The fable that Soros gets out of a bad trade when his back starts hurting is partly true. I could go on but that would be digressing. Asset allocation is useful for most people but many advisors get it very wrong - for instance advising that all those at retirement or close to it must have only a small allocation to equity. Generic advice based on risk assessment, age and social profile can be "robotized" - automated advice is starting to change the world anyhow, with sites like wealthfront. (For full disclosure I'm working on something like this so I'm biased) Even the Bogle folks have found a simple asset allocation method that's fully automated - like target year funds (so if you are retiring in 2042, you just buy a 2042 fund, which auto allocates between debt and equity and what not) However, robotic advice isn't useful for many people. My dad passed away in 1997 and left mom a house and shares of about 20 companies Only about 8 of them survive today. Most robo advice would have looked at her age, her risk profile etc. and told her to sell those shares and put money into an FD. Today what she gets as dividend is about the value of the shares in 1997. So advisors can do a good job here by looking into the situation in a more detailed manner and not use templatized assessments. Unfortunately this is not very scalable as a business, or I haven't found the right way, because I've been looking at it closely. Back into gyan mode - The biggest thing that individuals who aren't clued into the market have, is diversification. But, and to paraphrase a saying, there is such a thing as "di-worse-ification". Meaning, you buy different things but they give you the same result as buying one thing. I know people with 15 mutual funds. Fifteen. This is insane because most of those mutual funds are buying the same underlying stocks! (I go like "buy two. If you can't be happy with two funds you'll probably want to buy the stocks yourself") And you should probably not buy more than 15 anyhow; I nearly die tracking more than 12. The problem with going with advisors is that you have to spend a lot of time (and many times, money) finding the right advisor, especially when most of their track records are only reference based. Biggies like Citi Wealth are just terrible (I have not seen a single person who has had a satisfactory return from their practice), and within the small guys there is no way to easily measure performance or get independent assessments. And if you don't have enough money, you can't afford the really good advisors who will prefer to only have a limited number of clients. So if you have a small amount of money (less than 5-10 lakh of investible capital) you might find it better to just skip the whole advisor thing and go generic/direct. And it does seem that a large set of people fall into that metric...
