
Who to approach and ask if I have a question regarding my investments or savings or retirement planning?
This may look to be a trivial question, but need not be so. Where do we source our information and knowledge is a key aspect to finding the correct solution. Many a times, sourcing information or knowledge happens adhoc mainly through friends, office colleagues and relatives. However, these can be sub optimal. Investing some time to identify the correct person/institution to seek advice from is extremely crucial. In the context of investments, an independent financial advisor can fill this vacuum, even if you are a financial expert yourself. Just like knowing which doctor to go to if you have a disease diagnosed, it is also important to have a trustable independent financial advisor to manage your money and advice you on many things including retirement planning, real estate, insurance, etc.
Trust and independence are essential characteristics to choose a financial advisor. He/she should have proper accreditation, experience and poise to understand your specific situation and provide advice accordingly. Independent advisors do not seek compensation from the product providers and seek compensation only from clients for whom they provide the advice. (fee only advisors) This establishes the fact that the advisor will only work in your interest and not in the interest of the organization whose products he/she is recommending as part of your portfolio. Imagine a doctor telling you that he will not charge you any fees because he gets commission from pharmaceutical companies for prescribing their drugs! A transparent advisor can help build the needed trust and this will create a win-win situation. How to spot such an advisor? That is a difficult thing. You may have to use your existing network (family, friends, relatives, colleagues) to get references or you should be prepared to do your own research on the internet and reach out to them proactively. Many investors may think that they may be too small for an advisor to commit his time. This may not be true as there are many mid-sized boutique advisors who specialize only in serving mid-sized clients.
What is Long-term?
A typical gut based answer will be 3-5 years. However, this number is not backed by any research. A long-term is simply that period where even if you are caught with a wrong start (like 2008), you will have enough time to recover your capital and move on. It can be 3 years, 5 years or even more depending on the market that you are looking at. Here, the concept of “drawdown” can be helpful to frame an answer. According to Investopedia, “A drawdown is the peak-to-trough decline during a specific recorded period of an investment, fund or commodity. A drawdown is usually quoted as the percentage between the peak and the subsequent trough. Those tracking the entity measure from the time a retrenchment begins to when it reaches a new high” For eg., if the value of investment is 100 to start with, and then it goes to 70 in the next three years and climbs back to 100 in another two years, then the full drawdown cycle is 5 years. In other words, you waited for 5 years just to get your money back. Let us look at this for the Indian stock market in the last 20 years. (Nifty)
In the last twenty years, Nifty experienced six major drawdowns. Drawdown 4 is the longest and most testing drawdown lasting 72 months. In other words, if you had invested on 31st December 2007, you would have to wait 72 months before recovering your investment. Drawdown 5 was the smallest 6 months. The longest drawdown of 72 months or 6 years can then be considered as a reasonable proxy for defining the long-term. However, this is not to suggest that in future drawdown duration will always be less than 72 months. If and when a new drawdown occurs with more than 72 months, we should be willing to revise our definition of long-term accordingly, But for now, suffice to say that 6 years is reasonably a good definition of a long-term.
The first part of the 4 key Investment Questions Series – Wait or Invest