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Is A Client Responsible For Investment Policy?

One of the fundamental decisions an investor must make relates to investment policy.

To highlight the potential problems and issues, it may be instructive to ask a hypothetical queston.

An investor has an investment advisor. They meet three or four times each year and discuss changing personal circumstances, markets, other possible investments and more. When it comes to purchasing units in a fund or making a switch between stocks and bonds, the client listens to advice and generally, if he agrees, follows that advice.

However, the investor is fast approaching his retirement. In under one year, he will have retired. Yet despite this, he has several hundred thousand euros invested in stock funds. This is a very large proportion of his net worth.

Under such circumstances, any rational investor should be selling on a regular basis and turning stocks into cash to lower the risks.

But, when it comes to selling altogether, the client simply refuses. He has a home mortgage and the money could be used to repay the debt. This would be sensible for almost anyone approaching retirement.

If the market goes down and our investor makes a loss just before retirement and is unable to sell holdings at less than the purchase price paid, whose fault is it?

Is it the advisors responsibility, or the clients? Remember that the client has ultimate power over decisions here.

Suddenly, investment policy is vital. Even more so when it is not carried out.

As I hope you will be thinking, the client is responsible here - whether he thinks so or not.

Even with a professional advisor or stockbroker, the client needs to take investment policy very seriously. It is, after all, the client's money and it will be him or her that makes a financial gain or loss.

In his wonderful book of 1976, Winning The Loser's Game, Charles D Ellis says this:

'Investment policy, wisely formulated by realistic and well-informed clients with a long-term perspective and clearly defined objectives, is the foundation upon which portfolios should be constructed and managed over time and through market cycles.

In reality, very few investors have developed such investment policies. And because they have not, most investment managers are left to manage their clients' portfolios without knowing their clients' real objectives and without the discipline of explicit agreement on their mission as investment managers. This is the client's fault.'

Your author does have such a client as in the above example, and it is difficult to explain just how much risk the investor is taking.

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