3 ways to help your customers get the best of investing in the current market

It’s been a long time since there’s been this much uncertainty in so many areas. In the past few months alone we’ve seen:

• Many loan repayments getting more expensive due to rising interest rates
• Energy prices going up at a rate that means many are struggling to meet other basic costs
• Food prices increasing significantly
• Many investments bouncing around in value like a yo-yo

Against this backdrop, you might be finding clients asking whether saving and investing is a smart move right now, given all the aforementioned volatility. At Multiply we always take the view that the following core areas should be taken care of first before investing:

• Budgeting
• Building an emergency fund
• Protecting any loved ones

But say your customers have budgeted properly, got an emergency fund in place and protected themselves and their family - could now be the right time for them to invest?

Here’s our take on advising those customers asking this difficult question.

First things first, gauge their attitude and ability

Your customers need to know themselves before entering into such an unpredictable market. A key part of that process is understanding:

• Their attitude to risk
• Their ability to take risks and manage losses

Attitude and ability are two very different factors. Someone may have an attitude where they might want to take lots of risks, but financially they can’t afford to. On the reverse, they may not like taking risks but could have accessible money they don’t need and could in a worst-case scenario afford to lose.

Investors should understand both so they can strike the right balance between the two. We stress to prospective investors that even if they can afford to risk the money, they shouldn’t do it if they have a low attitude to risk and/or it would keep them up at night.

Secondly, get them to understand that the good times don’t last forever

Prospective investors also need to consider the bad times as well as the good. At the current time we’re finding some investors (who hadn’t taken advice!) encountering the following problems:

• They had previously invested, but are now finding out they don’t have the ability to suffer losses; If only they had built an emergency fund!
• Others have miscalculated their attitude towards risk and are now seeing losses that they had not expected or thought were possible

Currently, we meet many worried investors who ask “Should I change anything?”. Well, the answer is ‘Maybe’, but it wouldn’t be because of the current investment climate. It would be more about whether any existing investments are suitable for them.

If their existing investments are not aligned with their risk profile, then maybe they should be considering a change, but otherwise, we revert to recommending that they hang in there.

Investing can be very emotional and at times like these, the volatility can be a real test of both attitude and ability to manage fluctuations. For some, they find that they just cannot abide being invested in something that fluctuates in value. So how can you assess their attitude and ability to take risks?

Thirdly, think about applying a more sophisticated risk tolerance tool

Pre 2000, risk within financial advice was as simple as asking if you had a ‘low’, ‘medium’ or ‘high’ attitude and rarely was any thought given to emotions or someone's ability to suffer losses. Today, there are numerous psychometric tools available, most of which can help a potential or existing investor pin down their attitude to risk and a few also consider the person’s ability to deal with losses.  

A good risk tool will ask a number of questions (usually at least 10), have detailed descriptions of the risk profiles and also show the likely extremes of volatility that you might see. We would encourage people to pay attention to the downward volatility figures because these are a better test of their emotions in the event of losses.

So whether we are serving someone new to investing or someone with existing investments, by using a risk profiling tool, we should be able to establish their current risk profile, which should in turn indicate the type of investments they should be holding.

Conclusion

In summary, our core message to investors, whether new or seasoned, is that investing is a long-term game and investors need to understand themselves first to make sure that any investments held match them.

If they do, all is good and we believe investors shouldn’t be changing investments based on short-term market circumstances. Instead, they should take the long-term view, which is that ‘over time the ups will outweigh the downs’.

That being said, if an investment portfolio is unsuitable, they really should be taking advice on the most suitable action to be taken.

Volatility will always be a major factor and when it drags an investment portfolio down in value, investors need to be able to ride it out. Obviously, there are times when they will want or need to make changes, but selling when values are low is generally not advised.

If there is a positive to be taken about the current climate, then if someone does have cash available which they can afford to invest, buying in whilst markets are low can be better. Buy low, sell high is a very simple mantra to invest by and is the reason why such investments are for the longer term.