As Valentine’s Day approaches, many of your clients will be devising plans with their partners. They may involve holiday getaways, lavish presents, and romantic nights out, but for some, a cosy evening indoors and a decent romantic comedy might suffice.
2011’s Crazy, Stupid, Love flew under the radar for many audiences. Yet it’s a romantic comedy with an all-star cast that offers up a few important lessons that might benefit your clients’ investments.
Recent market volatility, high inflation, and rising interest rates might have pushed even the most level-headed of investors into feeling slightly nervous. But it’s crucial that your clients remain calm and don’t overreact to any short-term issues.
Financial planning takes a long-term view, and it’s one of the reasons why a passive investing approach over an active one might be the best solution for your clients.
Constantly reacting and making significant changes can increase the possibility of unintended consequences. It is a lesson that Steve Carrell’s Cal Weaver learns the hard way as he tries to patch up his collapsing life.
Passive investing is an investment strategy also known as “buy-and-hold”
Passive investing is a patient approach that aims to reduce costs and fees for your clients, while still maintaining the long-term growth needed to reach their goals. This is typically done with a “buy-and-hold” approach of retaining investments over the long term.
Passive investing will usually involve a well-diversified, evidence-based portfolio, which will largely be left alone to accumulate gains over time.
Read on to discover three important ways Cal’s journey in Crazy, Stupid, Love can teach your clients about the benefits of taking a passive rather than active approach to investing.
1. Passive investing can be less costly and has fewer risks for your clients
It is tough to predict the future, and the more your clients react and make changes based on short-term events, the greater the risk of unintended consequences. It can be a costly and time-consuming process.
It is a lesson Cal learns the hard way when he finds himself trying to piece together his fractured personal life in his late 40s. His long-time marriage has grown stale, and Cal soon learns that his wife, Emily, frustrated at going through the motions, has been having an affair and now wants a divorce.
After several nights of drinking his sorrows away at a swanky, local bar, Cal finds himself pitied by Ryan Gosling’s Jacob, a handsome young womanizer. Jacob frequents the venue and takes notice of Cal’s constant drunken whining about his broken marriage.
Jacob teaches Cal to be more like him and they slowly change everything about him from how he dresses to how he talks and behaves.
Cal’s life faced difficulty, and when faced with adversity, he opted to make massive changes. Cal is a nervous investor dealing with a volatile period, and Jacob is his active fund manager.
The active changes Cal makes eats up considerable time, racks up huge expenses, and ends up unintentionally pushing him further away from his long-term goal.
In an investment sense, your clients could see larger Capital Gains Tax (CGT) liabilities from an active approach, as well as the added oversight time and associated fees involved. There is also the increased risk that active funds could underperform or potentially see losses.
Things come to a breaking point when Cal attends a parent/teacher evening with his estranged wife. It turns out that one of Cal’s recent conquests is his son’s teacher, and it all comes out during an awkward confrontation.
Cal’s actions unintentionally hurt her and push Emily further away, which is the opposite of what Cal wants as he is still in love with her. The price of Cal’s active choices was costly and increased the risk of losing his wife completely.
2. Passive investing relies on evidence to achieve a higher probability of success for your clients
Passive investing relies on evidence and patience. It is an approach that could leave your clients better positioned to avoid underperforming the market.
Suppose Cal had been patient and calmly reviewed his situation. In that case, he’d have quickly realised that making wholesale changes to his life and pursuing other women was never going to achieve his core goal of winning his wife back.
It is likely that if Cal had stayed true to himself — waited and reflected —he’d have had a higher probability of successfully achieving his goal than actively making choices that ultimately pushed him further away from his wife.
It is when Cal finally realises how much he’s messed up and that the man his wife fell in love with was far closer to the man he was at the start that he calms down. He refocuses on his goal and makes patient steps towards winning her back in the long run.
In investment terms, looking backwards can sometimes have the same positive effect and increase the odds of success. This can involve relying on evidence, data, and an evaluation of past trends and performance to increase the probability of a portfolio outperforming the market over the long term.
It is important to note that very few active fund managers typically beat the market in the long run. According to the Financial Times, a study of 800 funds showed that only a third of active fund managers did better than passive index trackers in 2022.
3. Passive investing uses a patient, simplified, and transparent approach to reach your clients’ long-term goals
Making emotion fuelled decisions can be just as harmful in investing as in love. Several psychological biases are known to influence investors’ decision-making processes.
One known as “loss aversion” posits that people feel the pain of losses twice as much as the joy related to gains. In terms of investing, this can push people to make choices influenced by fear that aim to reduce greater losses.
For example, they may opt to sell during a downturn, turning short-term paper losses into actual ones, and removing the possibility of an investment bouncing back in the long term.
Passive investing navigates this problem and keeps your clients on course for their long-term goals.
Ultimately, when Cal realises he had the answers all along and that his wife just wanted the man he was to wake up and start caring again, he decides to:
- Shed all his newfound lifestyle and bravado
- Be honest with Emily and tells her how much he loves her
- Wait patiently for the day that they find their way back to each other.
In taking a passive investing approach, your clients will benefit from patience through the long-term performance of their portfolios, but also in the short term through the wellbeing benefits of reduced stress and a better understanding of their current state of investment.
As Cal puts it in his impassioned speech towards the end of the film: “I’m so mad at you. I’m really mad at you for what you did. But I’m mad at myself too. Because I should not have jumped out of that car. I should have fought for you because you fight for your soul mates”.
There is a Valentine’s Day lesson in that quote for investors as much as for lovers. Don’t give up and jump out of that car. Don’t sell at the first sign of trouble. Short-term issues can be navigated in the long term if patience and understanding prevail.
Get in touch
If your clients are concerned by recent events and the potential issues posed for their investments, they should reach out to us to discuss the best strategies for navigating short-term volatility to keep them on track towards meeting their long-term goals.
They can contact us by email at info@grey-parrot.co.uk or call us at 02039 871782.
Please note
This article is no substitute for financial advice and should not be treated as such. To determine the best course of action for your individual circumstances, please contact us.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
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