David Booth, Executive Chairman and Founder of Dimensional Fund Advisors, discusses how to easily pick the right Financial Adviser for you.
With more than 10,000 Financial Advisers in New Zealand, how do you pick one?
Who should you cross off your list?
First, eliminate the stock pickers. Those are the people making predictions about which stocks will be winners and losers. Cross off the market timers, too. They’re the ones who get into and out of the market, trying to buy the dip and sell at the peak. The problem with these strategies is that it’s unlikely any individual will be able to pick the right stock and the right time—especially more than once.1
Trust in evidence-based investment research
Over 50 years of research confirms that people can neither pick stocks nor time markets consistently year after year. The most intelligent person on the planet isn’t as intelligent as the market. Markets are smarter than advisers.
Why is that so? Markets do a sensible job for sensible reasons. Buyers and sellers have to come together to make a trade. Prices must be low enough to attract new investors and high enough to entice someone to sell. Both sides have to feel good, or they don’t make the trade.
A Financial Adviser can help capture market returns
That’s why you should trust the Financial Adviser who trusts the market.
These people help investors capture the returns of the market rather than attempting to outsmart it. Decades of research support this strategy. So does the explosive growth of index funds.2
Why should you trust the market?
Think of the market as a giant information processing machine. Prices change as millions of buyers and sellers react to new information coming into the market. Prices settle at “fair” values that seem reasonable to both the buyer and the seller. This should reassure people and give them the confidence to trust the market rather than fight it.
Historically stocks have returned about 10% per year.3 That’s about 6% above what people think of riskless assets like money market funds. Naturally, there are variations and no guarantee, but these are generally reasonable returns to buyers of shares in a company. Markets seem to operate the way people hope, which gives a fair chance of winning.
So where should you start?
It’s daunting to figure out what exactly to do and how to develop an investment plan. But you can’t avoid it. Few things are more important than creating a well-thought-out plan when investing your life savings.
In my experience, it’s easy to agree with these principles, but it’s hard to stick with them when times get tough. It would be best if you were a long-term investor.
If you accept these fundamental principles of markets and how they work, you owe it to yourself to find an adviser who does too. So, trust the adviser who trusts the market.
By David Booth, Executive Chairman and Founder, Dimensional Fund Advisors
First published: 28 October 2022
- Eugene F. Fama and Kenneth R. French, “Luck versus Skill in the Cross-Section of Mutual Fund Returns,” Journal of Finance 65, no. 5 (2010): 1915–1947.
- Index investing has grown considerably in recent decades, with US equity index funds representing 52% of the US equity fund market at the end of 2021. Data sourced from Morningstar; funds of funds are excluded.
- In US dollars. S&P 500 Index annual returns 1926–2021. S&P data © 2022 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio.
Disclaimer: This article was first published 28 October 2022. This article is general information and does not consider your financial situation or goals and does not constitute personalised advice. There are no warranties, expressed or implied, regarding the accuracy or completeness of any information included as part of this article.
This material is issued by DFA Australia Limited (incorporated in Australia, AFS License No. 238093, ABN 46 065 937 671). Investors should also consider the Product Disclosure Statement (PDS) and for the Dimensional Wholesale Trusts the target market determination (TMD) that has been made for each financial product or financial advice product either issued or distributed by DFA Australia Limited prior to acquiring or continuing to hold any investment.