Over the past few months I have heard many people complain about the perceived lack of value they have received from their adviser in regard to their investments. I believe this is because many advisers fail to adequately manage portfolio risk, instead preferring to advise their clients to ride out the market volatility.
The problem with this is that instead of exiting the market to protect capital, investor’s funds continue to erode through strategies such as dollar cost averaging, yet the adviser continues to be compensated regardless of the value add to the client.
What is even more concerning about this is that it will continue to happen as the share market moves in cycles and every 4 to 5 years the market will fall around 20 to 30 per cent and every 20 years by around 50 percent. If advisers are to adequately manage their clients, they need to understand how the market unfolds so they can plan for these events and make appropriate adjustments to a client’s portfolio in order to manage the risk. Unfortunately many investors have paid a heavy price putting their faith in those advisers who, on the surface, appear more interested in the commissions they receive than the value they bring to the client.
So what can we expect in the market?
I don’t think many would argue with me when I say that one of the toughest jobs in the past 18 months has to be as a portfolio manager and market forecaster – this is because we cannot be right all of the time, even though our clients expect it. Over the past 18 months the market volatility and sentiment has caused many false moves in both shares and indices making it difficult to predict, and I don’t expect this to change in the foreseeable future.
Unfortunately many are being lulled into a false sense of security now that the market has been rising since March 2009, however, I believe this is just a bear market rally. Over the next few weeks I believe the market will become more volatile which will see prices fall away sometime between now and 22 May to below 3800 points. Following this, probability suggests that the market will then rise to its yearly high in late June or July to between 4200 and 4500 points. If this occurs, I believe the move down into the yearly low will be in August or September and be quite volatile with the fall likely to catch many unwary investors out.
Whilst I still believe there are good profits to be made over the next few months from astute investing, it is essential that anyone investing in direct shares use a stop loss to protect capital.