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Be yourself, know thyself

Staff reporter |  18 December 2013  |  Portfolio

knowOne of the most important requirements in DIY fund investing is to follow the famous dictum, "know thyself". It is possible to do well if one is a pessimist and to do well if one is an optimist. But shifting from one to the other to follow market moods is probably a bad approach. And being greedy and always wanting to get that little bit more is almost certainly a bad approach.

An article in the AFR shows how this plays out among professional fund managers. It notes that two of Australia's biggest funds, Platinum and Magellan, have opposite strategies:

"As markets hang on an announcement from the US Federal Reserve to taper quantitative easing, two of Australia’s best performing and most respected international fund managers are taking wildly different bets on the global economic outlook.

Magellan CEO and chief investment officer Hamish Douglass has built respect on top of returns to amass more than $4.3 billion in his global flagship fund in less than six years; while the revered Kerr Neilson has leveraged his reputation and track record to grow Platinum’s flagship international fund to almost $9.4 billion.

Mercedes

The performance of Magellan (14.6 per cent) and Platinum (10.6 per cent) flagship funds are running neck and neck over five years’ performance, but a look into the respective portfolios shows the managers see the world very differently.

Asia and European stocks are a feature within Platinum’s top ten holdings, while Magellan’s big bets are focused on US technology, banks and consumer staples. Magellan’s portfolio is skewed towards the more defensive stocks in the US with big predictable cash flows, while Platinum has is leveraged to a rejuvenation in cyclicals."

It is not just necessary to know one's financial preferences. It is also important to understand oneself as a person and what that means for time horizons, expectations and risk management. Some light is shed on that by Tim Mackay.

He notes that most SMSF members are physically and mentally healthy: 95 per cent are in good health. They will probably live longer, so won't look for advisers who are close to retirement, although they do value sage advice -- as they should. He advises younger advisers to team up with old hands.

They have significantly higher than average net worth because they tend to be successful in their working lives. Nearly all have passions outside of work. He says there is seemingly no rhyme or reason to their varied passions apart from one commonly held passion - travel.

Mackay gives a useful insight into the norm for SMSF members, which suggests most are intelligent and have a good grasp of administrative technicalities. The expressions of concern about that from industry and retail funds seems to be overdone:

"As successful business people, many already have considerable experience of running multiple structures including companies, family trusts and other vehicles. They have high levels of engagement with these vehicles, typically via their accountant, with tax management a key goal.

If you want to advise SMSFs, you will be well served by having a thorough understanding of the benefits and uses of all complementary vehicles. To optimise the service you provide SMSF clients, you’ll need to stay actively engaged with them and have a strong working relationship with their accountant.

Consider for a moment the psychology of SMSF members who love travelling. Travel removes them from their safe and secure comfort zone; challenges them; teaches them new ways of looking at things; enables them to interact on a personal level."

Present their SMSF as the vehicle that will fund their exciting lifestyle in retirement. Apply the lessons from travel psychology to your SMSF service. Challenge them with interesting materials, get them to look at their investments in different ways, interact continually with them on the things that are important to them.

The Rice Warner survey found that most SMSF members don’t intend to leave the proceeds of their SMSF to their children (with the family home as the key estate planning asset). It’s clear that the sole purpose of the SMSF is to fund their exciting lifestyle in retirement so make sure you know what your client’s ideal lifestyle looks like.

Rice Warner found a whopping 87 per cent of SMSF members are happy with the returns in their SMSF. These are people who derive pleasure from the control and flexibility an SMSF provides. They have taken control of their family’s financial destiny with their own SMSF and seek expert advice that helps meet their key goal of supporting their family’s desired lifestyle in retirement.

Despite their best endeavours and ample resources, given the psychology of SMSF members I seriously doubt that any of the large institutions can successfully capture significant market share in the SMSF space. Those best placed to serve this exciting, growing market are highly qualified and experienced SMSF specialists."

 

Mercedes


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