Stop making these 5 mistakes, say these financial advisers

Sara Allen

Livewire Markets

If I told you the following had a lot in common, would you believe me? A vintage car owner, martial artist, finance fiction writer, keen golfers, adventure junkie and a podcast host. This doesn't even cover the complete list of unique hobbies shared with Livewire! All personalities united by a career in financial advice and a shared passion to make lives better through financial management.

Across two series of Meet the adviser, we've met some amazing advisers with some great tips and lessons - both from their own fails and those of their clients. I took a journey down memory lane to find that alongside their careers and passion, this diverse group also had common ground in the mistakes they typically found in portfolios, along with the tips they had for investors in the current environment.

So without further ado, here's what you need to know.

The most common portfolio mistakes and how to fix them

1) LACK OF DIVERSIFICATION

“The most common thing I assist clients with initially is increasing the diversification of investments within their portfolio – many of them have a handful of concentrated shares in either one industry or market and they’re holding themselves back from other opportunities.”
Shayne Sommer, Shadforth Financial Group
By the same token, overdiversification can equally be a problem where clients buy too many different companies that either don’t fit their risk profile, are actually too similar meaning they don’t offer diversification of revenue or don’t match the needs and objectives of clients.

Tip to investors: be sure to consider different asset classes, industries and styles of investment. You don’t need to have millions of different investments but an even spread is useful. Australian investors typically have a bias towards ASX 200 listed companies so don’t forget to look outside shares and also look internationally.

2) NOT BEING AWARE OF THE COSTS OF INVESTMENTS

Fees eat returns – this is not to say fees are bad but it’s worth being aware of what you are paying for and what you are getting in return. It’s also worth noting that as technology changes, some styles of investing have become cheaper so staying in the fund you had 20 years ago may not be as cost effective as it used to be.
“Another common mistake is the underlying cost of investments. Several retiree clients were sitting in older-style products or managed funds and they didn’t know what they were paying. We did a cost comparison and were able to show investments that were available at a fraction of the cost.”
Ron Pratap, RP Wealth Management

Tip for investors: Keep up-to-date with your investments and what they cost. It’s not always a bad thing to change funds if you can receive the equivalent package for better value.

3) LACK OF STRATEGY

I didn’t think I was the only investor guilty of purchasing whatever takes my fancy on a given day meaning a portfolio of very randomly selected investment and it turns out, it’s a common mistake.

“One common mistake we need to fix are haphazard investments which clients have selected over many years which don’t complement each other, such as holding similar (or sometimes exactly the same) assets, or where the investment styles conflict or are too highly correlated”
Antoinette Mullins, Steps Financial

Tip to investors: take a big step back from your portfolio and work out your overall strategy and what you need to build it and when you research investments, consider how it fits within the overall portfolio. (Yes, this sounds painful – there’s a reason why financial advisers exist and that’s to worry about this stuff for you!)

4) INVESTMENTS THAT DON’T MATCH THE INVESTOR’S RISK PROFILE

“The most common mistake I see with the portfolios I inherit is a misalignment of a client’s portfolio with their risk tolerance – especially when it comes to a client’s exposure to growth assets (and the type of growth assets). Fixing them depends on the situation and the experience a client has had previously with those assets.”
Nicola Beswick, FMD Financial

Tip to investors: spend the time working out what tolerance you have for investment risk – that’s not just your personal feelings on risk but your financial capacity to manage risk. It’s that old story of young people have longer to hold their investments through market cycles and can manage greater risk than those close to retirement. Then you can work out how best to structure your portfolio and which investments best suit your needs and objectives.

5) TOO MUCH TRADING AND ATTEMPTS TO TIME THE MARKET

Whether panic selling or FOMO investing in dips, too much trading is a common error. Most advisers typically take a buy and hold approach with investments for good reason – its conservative and tends to work better over time.

“The number one issue by far is selling when markets drop and buying again when people are confident that they have recovered. I believe more money is lost by doing this than any other mistake.”
Daniel Thompson, Finnacle

Tip to investors: If you pick good quality investments and have done your research, stay the course. Take profits where the opportunities are right, buy where you see value or the right opportunity for your portfolio, sell if you no longer want a position anymore or it doesn’t fit within your broader strategy.

The top tips for investing in the current market

1. PLAN FOR ALL MARKET CYCLES - NOT JUST THIS ONE

“I tell clients that instead of trying to beat the market, let’s make sure the market doesn’t beat you. The challenge for us as investors is to look beyond the now. By the time you and I can react or respond to the news, the market has probably already priced in the information. It does it pretty quickly and pretty well.”
Robert Baharian, Baharian Wealth Management

As part of this, you should stick to your strategy and keep up your regular investment plans regardless of what the market is doing.

2. HOLD GREATER CASH BALANCES IN A RECESSION

There are a few reasons for doing this. One is to avoid drawing down your portfolio and crystallising losses in times of market distress if you suddenly need cash. It’s also vital if you have any leveraged investments from mortgages to geared funds so you can cover any increases in interest rates or value changes. The final aspect is to have cash for opportunities if they arise, such as that company you’ve wanted for a while but it was overvalued before.

“The Buffets etc of this world are cash heavy and investors who are opportunistic and selective will ultimately do well from the current dislocation in financial markets.”
Anthony Murphy, Lucerne Investment Partners

3. REMEMBER THAT VOLATILITY IS ALL PART OF THE INVESTMENT EXPERIENCE

Investing holds risks of losses or gains – but it’s worth remembering you’ve only lost money if you’ve sold a position and crystallised that loss.

“There’s a reason rollercoasters have safety straps – it’s to stop you jumping off at the wrong time. With market volatility, we need to remember the roles growth and defensive assets play in portfolios.”
Shayne Sommer, Shadforth Financial Group

A final lesson across any market is about gearing – a few of the financial advisers we interviewed suggest steering clear of highly geared products, such as Trent Doughty and Antoinette Mullins. Both have been personally burnt and are wary on behalf of their clients.

The top performing go-to managed funds

The advisers in our series referenced a range of managers and funds, such as offerings from Bennelong, Dimensional and Fidelity. Some of them were also hesitant to specify any go-tos, referencing the need to personalise to individual client needs and objectives. Of the 12 funds that they did specify as go-tos or part of their personal top holdings, these were the ones offering the top 1 year performance for FY2022.

Equities (Australian and global)

It was a tough year for equities in general and it’s notable that of a list of funds mentioned, only 2 offered positive returns. One of these, the Allan Gray Australian Equity Fund also featured in Livewire’s own top 5 performing Australian share funds for FY2022.

Trent Doughty, Kelly+Partners Private Wealth, nominated the PM Capital Australian Companies Fund as a go-to fund for the Australian equities exposure (he nominated different managers for each asset class exposure). He also nominated the Aoris International Fund Class A for the global equities exposure.

“We know all the portfolio managers of these funds on a personal level and have a high degree of confidence in their ability to provide solid risk returns outcomes for our clients. We also closely monitor their performance each quarter.”

Antoinette Mullins, Steps Financial, nominated the Allan Gray Australian Equity Fund Class B as one of her two go-tos. She uses it outside the core of the portfolio to complement index allocations in the portfolio.

“It’s a fund we use in most models, though it might not be the Core fund. Given the concentrated and contrarian approach of the manager, this fund is expected to perform materially differently to the general Australian equity market.”
Managed Fund
Allan Gray Australia Equity Fund – Class B
Australian Shares

Alternatives

There were 11 alternatives managers cited, ranging from long/short equities, infrastructure and property and private debt. The reference to alternatives as go-tos may be a surprise to some investors but won’t surprise financial advisers given the ability to offer diversification of revenue streams.

Anthony Murphy, Lucerne Investment Partners, nominated the Totus Group offerings which he uses within the Lucerne Alternative Investments Fund, for the following reasons.

Ben is a realist and often avoids the hype and fads the stock market and investing can bring. His continued disciplined approach has delivered investors a return of 16.5% p.a. since inception with a substantial amount of that out-performance being delivered in weak equity market conditions.
Managed Fund
Totus Alpha Long Short Fund
Alternative Assets
Managed Fund
Totus Alpha Fund
Alternative Assets
Nicola Beswick, FMD Financial cited the Australian Unity Health Care Property Trust as a top holding within her personal investments.
“This came from the love of direct property and hearing from the direct manager as part of my work. There is no interesting story that goes with this investment, other than medical centres and hospitals are essential to everyday life.”

The go-to ETFs

Like retail investors, financial advisers also find ETFs a useful tool so it shouldn’t come as a surprise that 13 ETFs made it to the list of go-tos or into advisers’ personal top holdings.

Unfortunately it was a tough year for the nominated ETFs, with only one of them offering positive 1 year returns for FY2022.

Charlie Viola, Pitcher Partners Sydney Wealth Management, and Robert Baharian, Baharian Wealth Management nominated the iShares Global 100 Fund (ASX: IOO). Charlie finds it a good base for global exposure. He would also buy SPDR S&P/ASX 200 (ASX: STW) for pure ASX 200 exposure and to pick a dip in the market.

Of the iShares Global 100 Fund (ASX: IOO), Robert says, “This sits alongside my VGS exposure and concentrates on the biggest and the best 100 companies around the world. I think this is one of the cheapest products in the market and a great momentum strategy.”
ETF
iShares Global 100 ETF (AU)
Global Shares
ETF
SPDR® S&P®/ASX 200 Fund
Australian Shares

Felicity Thomas, Shaw & Partners, placed the BetaShares Global Cybersecurity ETF (ASX: HACK) as one of her go-tos. She notes that thematic investments such as this which offers exposure to cybersecurity investments are typically higher risk investments so she uses them as satellite positions with the core of her portfolio allocated to the Shaw & Partners managed accounts.

ETF
BetaShares Global Cybersecurity ETF
Global Shares
Want to revisit our Meet the Adviser series? You can read about each of the advisers from both our series here

If you are interested in being profiled in our Meet the Adviser series in the future, contact us using the email address below: content@livewiremarkets.com


Sara Allen
Content Editor
Livewire Markets

Sara is a Content Editor at Livewire Markets. She is a passionate writer and reader with more than a decade of experience specific to finance and investments. Sara's background has included working at ETF Securities, BT Financial Group and...

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