Investing is like farming

Much has been written about how advisers and their clients have reacted to the recent crash in global financial markets.

The first reaction is to tell clients that there is no need to panic but this may come across as patronising unless there are good reasons to stay calm.

No need to panic

There should be no need to panic if an investment portfolio is set up correctly in the first place, and it properly managed and regularly rebalanced in line with changing market conditions.

The only people who need to worry are those with investments which were not set up correctly in the first place. Hopefully, this will not be clients of financial advisers but may include many of those who have chosen to select their own investments.

How to manage and rebalance

This begs the question: “how is an investment portfolio properly managed and rebalanced?”

There are many different answers to this important question but one of the best answers I have seen is from Dan Kemp who is Chief Investment Officer at Morningstar Investment Management Europe.H4> In a recent webinar he compared good investment management to farming.

Good investment management is like farming

He said "investing is like farming in that we plant an investment seed and watch it grow to become more valuable over time." However, farming requires patience and a farmer does not constantly dig up seeds to inspect them. A good farmer will plant his seeds, tend to them and watch them grow over time.

Investing, like farming is seasonal and there are times to plant and times to harvest. Generally speaking, the best time to harvest is when prices are high and the best time to plant is when prices are low, e.g. after a market crash.

But working out when is the best time to plant and harvest investments is difficult and unlike farming where the seasons are predictable, market crashes are not predictable.

When to sow and when to harvest

A market crash provides fertile soil into which new seeds can be planted for future growth but new seeds can only be planted in ground that has been previously cleared of the last harvest so it is important to clear some space in an investment portfolio by selling some investments when prices are high.

This is fine in theory but difficult in practice and many investors will not harvest their investment at the right time as they may hold on to well performing funds even though there might be signs markets are overheating.

So how can advisers work out when to buy and sell investments. The short answer is they cannot. Investment timing is best left to the investment experts who run well diversified multi-asset portfolios.

There is nothing wrong with farming out investment decisions

If investment managers are like farmers, advisers are like doctors. Advisers should look after the financial health of their clients and if their financial health is deteriorating they should prescribe the appropriate medicine.

When things return to normal, if they ever do, financial advisers should consider becoming better doctors and farm out the investment management to the professionals.

You can listen to Dan telling his story about investing and farming on this Morningstar Webinar. Dan's piece is about 2 1/2 minuets in to the webinar after the short introduction.