In our endeavour to help you create a least-effort portfolio, we had discussed in this column last week that you should not spend much time in assessing your risk appetite.

Several readers responded to the article , stating that all our suggestions so far, if implemented, would make investment advisers irrelevant! That is not our intention. We wish to reiterate that investment advisers can add value to your portfolio.

In this article, we discuss why the value-added services of your adviser comes more from financial therapy, and not from helping you buy some investment products from the market.

Beyond investments

There are two rules to creating a least-effort portfolio. One, you should invest for a purpose, not just to earn returns. And two, your investment process should require you to spend minimal time in translating your savings into investments.

Our objective is simple. You should achieve your goals without spending your leisure time evaluating investments or monitoring your portfolio; for leisure time should be set aside for family and fun activities. It is in keeping with this spirit that you should carefully evaluate the services that you can ask of your adviser.

It is typical for individuals to seek the opinion of their adviser to recommend best-performing mutual funds, stocks or commodities for investments. In a least-effort portfolio framework, your task is clearly laid-out. A significant proportion of your portfolio will be in index funds, an investment that you can make without the help of your adviser. And if you do want to invest in active funds, remember this: No active fund can consistently outperform the market. And advisers cannot consistently pick active funds that can outperform the market.

Therefore, it is moot if you should use your advisers for only such recommendations. You should instead concentrate on fine-tuning your investment process so that you are always on the path to achieving your investment objectives. It is in this context that your adviser’s role as a financial therapist becomes important.

Financial therapy

Research in psychology has found that our past experiences, especially negative ones, can unconsciously affect our decisions. If you have, for instance, witnessed your parents lose their wealth because of a market crash, you will be averse to investing in equity, even if you have the ability to take high risk. This can cause problems if you are self-managing your investments; your aversion would prompt you to invest less in equity, even if doing so will hurt your investment objectives. An adviser, as a financial therapist, can help you recognise your unconscious feelings and moderate your aversion to equity.

Sometimes, your biased decisions can also affect your investment performance. Consider these two examples. One, you may have suffered a setback in your business or profession, causing emotional and financial stress. And if the market crashes during this period, you may be tempted to sell your retirement investments at a loss. It is not good to take a financial decision when you are stressed, as your logical-thinking ability can fail. Your adviser can help you moderate your cognitive error and talk you out of such a decision.

Two, you may be spending more than you should on non-discretionary expenses or, perhaps, you may be stretching your household budget by taking a large mortgage on your home. Your adviser can apply behavioural psychology to nudge you into spending less and saving more.

Conclusion

Your cognitive and emotional biases stand between you and your portfolio’s good investment performance. And your portfolio’s performance is a critical variable in achieving your life goals. So, it is important that you identify and moderate your cognitive and emotional biases. Your adviser can help you in this regard; he/she can act as your financial therapist and continually nudge you on your path to financial freedom.

(The author is the founder of Navera Consulting, a firm that offers wealth-mapping and investor-learning solutions. Feedback may be sent to knowledge@thehindu.co.in )

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