Can GLP Profiling be used to Time the Market?
In short NO, that is NOT what the program has been designed to do.
GLP Profiling is not designed to create an 'ideal time to enter the market' it is designed and should only be used to manage a clients risk capability in a real-time function.
Would GLP create disillusionment within an investment strategy?
No. What it will do is manage the Risk of the strategy in a more effective manner than just a pure risk profiling measure. As Kahneman identified, the Reflective Mind only comes into play when the potential of loss outweighs the potential for growth. If an Adviser has created a sound investment strategy then GLP will act to support this strategy, however, if the strategy is in actual fact simple ‘product positioning’ then to a degree, GLP will act as a measure to question the product positioning. The real question here is, are Advisers creating true strategies or strategies to support product positioning?
Will GLP minimise potential risk for clients?
Yes. The level of Risk/Rewards is now able to be managed in a more definitive fashion. Typical GLP levels range within the 30% +/- tolerance mark which is the range most investors are comfortable from a risk tolerance position. Any rates below this level reflect the initial asset allocation test and present a picture of a client investing in a sector to which they are either not comfortable with or do not understand the presented outcome expectation of their investment portfolio.
How does GLP minimise risk for the client?
As with any good understanding of investment strategy, discussion must not solely centre on the potential for growth but also how best to manage risk within the portfolio. Our own research identified that, ‘general investment advice’ was based on a moderate level of market fluctuations reflective of the historic asset class models and that SOA’s contained detailed disclaimers in relation to risk and return but not capacity for GLP tolerance. By providing a client with a measure to monitor both Returns and GLP Tolerance within the portfolio the ability for a client to sustain market movements is strengthened. In effect it negates the knee jerk reaction that Kahneman identified as the Reflective mind reaction- inertia to loss aversion.
Is there a risk that GLP would create ‘emotional’ reactions to market performance?
US studies in 2009 highlighted that emotional reactions to market turbulence is directly related to the timing and level of involvement of the Adviser. If the adviser is proactive and engaging with the client then the level of ‘emotion’ is greatly reduced. Research suggest that fundamentally, although consumers express concern about the impact of the market on their investments, even with significant drop in returns consumers do not ‘jump ship’ from one fund to another seeking that ‘safe haven’ unless the flow of information from their Adviser ‘dries up’ or in a worst case, their Adviser goes into ‘hibernation’.
A Harvard research paper identified that Retirement fears had nearly doubled since the first market drop in 2008 to 2009, the spike across the segment was not so much on the rate of reported returns but if the advice was still relevant. The concerns were magnified in cases where the Adviser failed to pro-actively provide simple effective guidance in uncertain times to clients.
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