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In the introduction and current situation of the series of reports of the White Paper on Investor Returns, we systematically sort out the factors that cause the gap between investor returns and product returns, and deeply analyze the origin of the difference between investor returns and product returns, as well as the current situation of investor behavior and the asset management and wealth industry that cause this difference.
Starting with the solution article, we will study from multiple angles and try to come up with feasible solutions to the above problems. The first part of the solution focuses on the role of customer portraits and how to do a good job of accurate customer portraits. In this article, we will focus on the introduction of common ideas and strategies that can help improve investor returns.
These ideas include closed-loop thinking, underdog thinking, account thinking, and asset allocation thinking. In this article, we will talk about their respective characteristics and usage scenarios.
Research shows that there are many investment strategies that can reduce investors' irrational behavior and improve investor returns in the specific investment process. In a word, the so-called investment strategy is nothing more than solving the problem of when to buy and how much to buy. Applying the strategies outlined in this article can help boost investor returns.
01 Weak thinking is the starting point of wealth management
The weak mindset is often associated with fear of the market and the unpredictability of the market. And this is indeed the case. Short-term forecasting is an unreliable thing, and investors should respond based on the thinking of the weak. Responding well is often more meaningful than predicting.
Based on the dimension of more than ten years, the long-term law of asset returns is often rule-based. But don't try to predict short-term things with a strong mindset, because the cost of wrong forecasts is very high, for example, at the peak of core assets in 2021, many funds were sold out and allocated proportionally, but now the market has fallen very sharply, and investors have become conservative and safe. In retrospect, short-term forecasts play a big role. Second, don't judge a high-risk or low-risk asset class lightly, because the solution is what customers really care about. Wealth management should be a result-oriented, and the customer's desire to manage money is very simple, that is, to make money, leaving the simplicity to the customer and the complexity to himself.
From the sales data of the fund in 2020 and 2021, it can be seen how unreliable the short-term forecast is. At the time of the fund sale, most asset management institutions and wealth management institutions continued to be bullish on A-shares. And few have suggested that the market may have overheated the risk.
As Figure 1 illustrates, the FOMC's forecast for the Fed's path of rate hikes and rate cuts is very different from the actual path.
Figure 1 The Fed's forecasts for Fed rate hikes and rate cuts are also often divorced from reality
数据来源：The Fed - Meeting calendars and information (federalreserve.gov)
There is another meaning to the thinking of the underdog. Even investors are relatively weak in the face of the capital market. Most of the customers of wealth management are ordinary investors, individuals and families, and a small number are institutions. These investors vary from age to age, level of wealth, and investment experience. From a professional point of view, these investors have one thing in common, that is, their general understanding of financial investment and capital market is relatively rudimentary. Most investors have never even been exposed to the stock market or related markets. Most wealth management investors, including wealth management institutions, are in a relatively weak position in terms of information acquisition and interpretation. Therefore, the so-called chasing the rise and killing the fall, buying the bottom and escaping the top, buying and selling are very difficult for these investors, and the error rate is extremely high. Considering the professionalism of the client, investors should be made aware of and understand the volatility through long-term and gradual accompaniment. In this process, we still strive to help our customers achieve their financial goals.
Based on the thinking of the weak, on the one hand, the market is difficult to predict, and on the other hand, investors are relatively unfamiliar with the capital market. Cognitive issues are left to long-term companionship, but investors' financial needs are really needed to be met. Therefore, we need to start from the underdog mentality, build our own framework and system to help investors achieve their financial goals.
02 Application of closed-loop thinking in wealth management
In the past, we used to recommend this financial product to investors, that financial product, and the financial product was sold and it was over. Pay more attention to front-end sales and less back-end. In this case, it is not a big problem if it is a fixed income product in the era of rigid payment, but in the new era of net-worth transformation, especially when many financial products have more or less stock positions, the problem is particularly obvious. After the financial product is bought, it begins to fluctuate at the same frequency as the capital market. Rarely, systemic risks arise. Companionship in the process of normal fluctuations and the reminder and prevention of systemic risks are necessary processes.
In the past, many institutions did not pay enough attention to this.
We only consider how to let customers buy products, and do not consider customer take profit, and the thinking of customers selling financial products is called open-loop thinking. In fact, many customers often encounter such confusion in the process of financial product consumption, no one cares after buying, I don't know how long I should hold it, I don't know if I should take profit when I make money, I don't know if I should take profit if I lose money, I don't know whether I should increase my position or stop loss in time, and the follow-up service is missing. It is precisely the final result of financial products, whether you can make money, this matter is not known when you buy it, it is not a result-oriented thing, but a process-oriented thing, you know how I operate, but I can't guarantee the result, this is a very core key to serving customers well. Just like in the world of netting, what's the only way you can make money? There is the action of buying, there must be an action of selling, and in the end you can make money, otherwise it is all wealth on paper. However, we will find that there are actually too many organizations based on an open-loop operation, which is not very effective in improving the sense of acquisition of customers.
On November 25, 2023, China Economic Information Service, Chongqing Jiangbei District People's Government and Chongqing Jiangbeizui Central Business District Management Committee hosted the "Welcome the Era of Buy-side Investment Advisors - 2023 Wealth Management Transformation and Development Forum" in Jiangbeizui, Chongqing. Tao Ronghui, general manager of Harvest Wealth, said in his speech at the forum that the core of wealth management is to achieve reasonable planning of life cycle cash flow, the focus of buy-side investment consulting is to serve customer needs with product tools and solutions, and the long-term in-depth companionship between buy-side institutions and customers is the top priority to practice the high-quality development of the buy-side investment advisory industry.
The foundation of buy-side investment consulting is to make products, tools and solutions serve the needs of customers. Mr. Tao believes that wealth management should shift from "open-loop" thinking to "closed-loop" thinking. Wealth and asset management is not the end of selling products to customers, and follow-up services cannot be missing. In the past, too many open-loop operations have made many customers eventually become "fund sea kings", holding a lot of funds in their hands, but they don't know when they bought them and what to do with them. Therefore, the "closed-loop" thinking is very important in the practice of wealth management, all the goods that customers buy should have a user manual, and a "closed loop" should be formed at the moment of purchase, that is, what kind of situation should be taken profit, how long it is expected to be held, what kind of investment goal is there, and how to deal with it when the product performance deviates from the expected goal. Making "open loop" into "closed loop" is the key to serving customers well.
03 Account planning is the first step in wealth management
Investors are still relatively unfamiliar with account planning from the perspective of accounts, and single product thinking is still dominant. The disadvantages of single-item thinking are mainly focused on risk exposure. Starting from a single product thinking, it is easy to focus too much on a certain type of asset. Once there is a large fluctuation in a certain type of asset, the overall account of the customer may decline significantly. From the perspective of accounts, we are prone to have an overall concept, allocation concept, and risk concept, and it is not easy to fill a class of assets. In this sense, doing a good job in account planning itself plays a certain role in risk control and risk diversification.
The sense of gain and return of the majority of ordinary investors is affected by short-term capital market fluctuations on the one hand, and account planning on the other hand. For ordinary families, planning their accounts based on their own financial needs and risk tolerance may be the work that needs to be done before making financial investments. Account planning includes a variety of contents, in addition to the allocation of major types of assets, as well as cash flow planning, liquidity planning and so on.
After doing a good job of account planning, we distinguish between the money that we need in the short term and the money that we don't use in the long term. Different funds have different risk attributes and return target attributes. The risk-return characteristics of different types of financial assets are also different. This determines that the financial instruments that match the two should be different. The so-called, "short money short investment, long money long investment", it should be said that this is what it means.
Generally speaking, equity assets are more risky, but the long-term expected return is often higher than that of bond and currency assets. Therefore, it is reasonable to use the money in the short term, because the term of use is relatively short, and it is relatively clear, and it cannot withstand large fluctuations, which determines that the best financial investment tool for this part of the money may be bond assets with relatively low risk and relatively low volatility.
The money that is not used for a long time, because the funds do not need to be withdrawn in the foreseeable future, then this kind of funds are more able to resist the short-term fluctuations of the stock market and dilute the bull and bear cycle of the market. Considering that stock assets tend to have higher expected returns in the medium and long term, it is only natural for investors to reasonably allocate stock assets in long-term accounts.
On the basis of reasonable planning and allocation, it is easier for ordinary investors to calmly face the short-term fluctuations of the stock market, including possible bear markets, and even increase the allocation of high-quality stock assets during the bear market through regular investment, dip buying, and dynamic rebalancing.
This is even clearer from the perspective of the family's overall financial account. Household financial accounts may need to integrate overall financial wealth into a unified plan. This may include real estate, deposits, currency funds, trusts, bank wealth management, stocks and equity funds, and equity funds. Investors can try to look at the volatility of the capital market from the perspective of the overall account, rather than being limited to looking at the volatility of the stock market from the perspective of equity-like assets.
From the perspective of accounts and account planning, we observe the allocation of investors' stock assets, no longer from the short-term perspective of the capital market, but from the perspective of investors' accounts, in fact, from the perspective of investors. This should be an investor-oriented embodiment.
04 Asset allocation is also a kind of underdog thinking
The basic meaning of multi-asset allocation is to find different sources of income to allocate in the right proportions. The ratio depends on the investor's own risk tolerance in the medium to long term. This risk tolerance is related to the magnitude of the decline in the capital market. If the decline is too large, investors may not be able to hold on, and this feeling can prompt investors to take action, including selling at the bottom. Through the reasonable allocation of different income sources, a certain degree of volatility reduction can be achieved, so that investors can hold the entire portfolio.
Compared with asset allocation, another approach is to make investments through market judgment. For example, when judging that the stock market is good, buy stock funds with a larger proportion. When judging that the bond market is good, buy bond funds with a larger proportion. The higher level includes buying U.S. stocks with a larger proportion when judging that U.S. stocks are better than A-shares.
Making the above judgment requires a very in-depth understanding of the movement laws of various assets. And this requires a long experience, and even the accumulation of lessons.
Even professional investors need to do a certain amount of asset allocation and risk diversification. When you think of "diversity", you may think of "banalization". But in fact, Markowitz didn't come at the expense of profit when he proposed that "diversity is the only free lunch." The impression that investors' asset allocation is often mediocre is mainly due to their obsession with navigating cycles.
We always want to reposition positions at the low of the cycle and clear them at the top of the cycle with one click. From the perspective of hindsight, this is indeed the most profitable, and there is no diversification. But the bull-bear cycle has taught us time and again that hindsight is not the same as foresight. It is relatively good to buy at the bottom, and there are very few people who sell at the top. Instead of this, it is better for us to take a step back, not to assume that we are God-men, but to imagine ourselves as a craftsman, and to do the things that are certain and the things that are likely to be right.
In the wealth management industry, the job of a craftsman may be asset allocation. If you study asset allocation thoroughly, you can often help customers make money, and there is a greater probability of defeating inflation. This may be enough for the majority of investors. Take the exam as an example, we have already got 80 points. On this basis, in a certain space-time environment, God appreciates food, and we can still get some additional questions right, which is great. But that's not our basic plate.
It can be said that asset allocation is also a kind of weak thinking, which is the awe of human nature and the awe of the capital market.
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