Andy Allen asks whether the financial crisis has frightened away the “Goldilocks investor” forever.
In early 2007 we heard many a market forecaster talk up a forthcoming “Goldilocks economy”. You know, the not too hot, not too cold market? Well, let me now introduce the “Goldilocks investor”. As you’d recall, in the original story Goldilocks stumbled across an unoccupied house in the woods. Taking advantage of the owner’s absence, she made herself at home and then settled in for a nap.
However, once the residents (enter the Bear family) returned home, she got the fright of her life and got the heck out, never to be seen again – an obviously highly emotional response to what would have been a very terrifying situation. A group of investors, like Goldilocks, have also made tracks since the market turned ugly at the beginning of 2008.
Having discretionary investor profiles, in a sense, they opted to put their disposable income into growth assets, hoping for an improvement in their wealth over three to six years. They entered the market at a time where everything looked rosy. Investing in managed funds with a balanced portfolio appeared to be a low–risk strategy.
Basically, they moved out of your classic saving and deposit vehicles into managed investments. Characteristically, their investment goals were somewhat modest – investing for kids’ future education, family overseas holidays and other spending et cetera – or, simply, plain old wealth creation. Coupled with regular saving plans – sprinkle in some instalment gearing and jackpot – 20 per cent year-on-year returns were a commonplace.
“How easy’s this!” they thought. What happened next, as we all know, was unprecedented. Everyone felt the market was an expanding bubble at the time, but no one knew the full extent of what was about to happen – well, perhaps a small few – and only a smaller few actually did anything about it. Emotions ran high with these investors; shock, anger, frustration, annoyance, confusion, helplessness and a sense of feeling alone – to name just a few.
With no sign of a market recovery after three, six and then 12 months and longer, confusion continued to reign (and still does). They began to question their own conviction around seeking, listening to and acting on the investment strategies presented to them by their advisers. So it’s not surprising the Goldilocks investors reacted the way they did. That is, cashing in what was left of their investments and ultimately realising a significant financial loss. Seeing their kid’s education savings plan in a mess really hit them hard, and is not something they’ll be likely to forget in a hurry. Many of them intend never to return.
Will Goldilocks ever return?
The last time the market in this country went into negative territory, according to fund inflow figures, it took a good three to four consecutive quarters of positive returns to encourage investors to come back. So, positive investment returns would be a great start – double-digit returns would make things even better.
However, don’t hold your breath here. Relying on investment performance, as we now realise, is also fraught with danger, as it under-sells a financial planner’s core customer proposition: advice. So, how do we restore their confidence without relying on investment returns?
The answer lies in knowing how the customer is actually feeling and what they need to experience to soothe these emotions – emotions which not only relate to the past, but also to the future. Lacking confidence, and the concern of not knowing whether they’re doing everything they can do to be better off financially, are two significant ones.
Re-educating them on the fundamentals of the investment market is also what they need. Returning to personal financial advice is something that will restore this confidence and give them the peace of mind that they have taken all the possible steps available. They will also appreciate the value of financial advice as being more than just a transaction, in the process – ultimately securing the adviser-investor relationship for the long haul.
But, before this stage, getting them back in front of an adviser will be a greater challenge. The missing link will be to rebuild consumer confidence and trust in an industry that is copping flack from all directions, fairly or unfairly. Some positive press, for a change, would definitely help. Consumer re-education from the industry bodies, such as the FPA, will also need to continue to play an active role. Once these investors are instilled with a belief and confidence that they can benefit from advice, only then will the Goldilocks investor return to the woods. Unfortunately, however, in the meantime, they might remain in a state of hibernation for quite a while.
