Being Smart Enough to Know what you Don’t Know

Neil Woodford went from hero to spectacular zero after his investment fund collapsed, leaving many inexperienced investors facing huge – in many cases life-altering – losses.

Other blogs have gone into greater detail elsewhere about the whole saga and what it says about regulation, the FCA and the way in which such funds are able to operate, but what we want to discuss here is the harsh reality which lies at the rot of many of the issues – that a great number of the investors in Woodford’s fund were simply too inexperienced to have been there in the first place, their attitude to risk having not been balanced against considerations like their capacity for loss – it’s all fun and games until t he fund starts to underperform and everyone wants their money back.

But to those who would react to such observations by comparing them to victim blaming, we simply say this – nobody is saying that these investors were stupid, but they were misinformed. The current state of regulation and the pensions market means that they were still able to invest in a fund that was clearly unsuitable for them, and in which many found themselves trapped after the fund was gated, following a surge of withdrawals as profit warnings were issued and investors got cold feet.

Had those investors instead approached a professional adviser and been given personalised, individual advice, they might have elected to make different decisions and invested in different funds more suited to their whole risk profile. Alternatively, they may have been better informed as to the likely trajectory and fluctuations of a fund like Woodford’s, resulting in fewer panicked withdrawals and possibly the whole precarious state of affairs being avoided.

Either way, as the old adage goes, being smart includes being smart enough to know what you don’t know. Very few people are experienced or knowledgeable enough to make sensible investment decisions with regards to their retirement planning that will both set up the retirement they want while avoiding the risks that they don’t. The perceived expense of such advice – when compared with the fees of entering a fund like Woodford’s – soon reveal themselves to be the smart investment when you aren’t scrambling to get yourself out of a fund that you fear may wipe out your retirement fund altogether.

As another adage goes, it’s better to be safe that sorry. Safe doesn’t need to mean dull, or conservative, but it does mean that you’ve taken the most appropriate advice for your own situation, and who can put a price on the peace of mind that could deliver, especially when you consider the alternative?