Thinking backwards can really pay off

The following are all things, one could argue, that are better done backwards: moonwalking, reminiscing, and wearing an Arsenal shirt when at the wrong end of the Seven Sisters Road.

To be clear, by ‘backwards’ in the final example I refer to the advised act of wearing said shirt inside out as opposed to the rather more perilous interpretation of walking in reverse around Tottenham displaying full Arsenal regalia, which would do little more than confuse and anger the natives.

Thinking backwards can also pay dividends. Asking ‘where do we finish?’ can be a thoroughly thought-provoking question up front. It is one advisers may benefit from employing more when it comes to risk assessment and portfolio construction.

It’s not really about your attitude to risk per se because, if you have £1m and you want £100 a year, you don’t need to take any risk

The subjectivity of risk has reduced terms like cautious and balanced to little more than marketing speak, and advisers agree they are becoming less helpful (certainly in their own right) in determining the appropriateness of investment solutions for individual clients. There is the suggestion that, as an industry, we have become too probability-focused and driven by the likelihood of outperformance.

“I might want to go base-jumping on my holidays, but that doesn’t mean I want my pension invested in Iraqi smaller companies”

But the new-world difficulties of an old-determining what the investor is working towards (goals, ambitions, lifestyle) and making investment decisions based on achieving the required level of growth with the least amount of risk.

What we traditionally haven’t done is say: ok, that’s what the investor is working towards, therefore we need to make an investment decision based on achieving that required growth rate with the least amount of risk

While there are innumerable elements of risk to take into account, from the client’s perspective the only one that really matters is the risk of not having the money they require to help realise their life expectations when they planned to.

Which takes us back to the old adage ‘the best return a client can get is the one they expect’ and the more pertinent question an adviser can ask: ‘What is required to maximise the probability of my clients achieving their goals?’

I’m waiting for someone to sue because their investment kept within the agreed bands of volatility but didn’t produce any growth

Starting at the end helps us focus on what really matters – appropriate client outcomes rather than nebulous (and often unnecessary) out-performance – and changes the focus from whether something may happen to how it may happen.