A lesson in investing from The Wizard of Oz

Financial advisers don't possess magical powers. But they can play a crucial role in helping you achieve your investment goals.

Readers of a certain age will recall an old Christmas tradition — the crushing disappointment of discovering, yet again, that the afternoon film on Christmas Day on BBC1 is the same film as last year, the year before and the year before that.

Yup. The opening credits to the The Wizard of Oz starring Judy Garland were the cue for the adults to fall asleep and the children to play with their newly opened toys. I can’t remember anyone in the Powell household ever watching that film from start to finish.

It was, however, a charming story, based on a 1900 children’s fantasy model by L. Frank Baum. Garland played the heroine, a teenager named Dorothy, who lives in a farmhouse in Kansas. One day, a tornado strikes and lifts the house into its funnel and drops it into an unknown land. A "good" witch named Glinda tells Dorothy to look for a yellow-bricked road and follow it to Emerald City, home of the Wizard of Oz. The Wizard, she assures her, will help Dorothy to find her way back home.

Along the route, Dorothy meets a scarecrow who desires brains, a tin man who wants a heart, and a cowardly lion who wishes for courage. All four of them hope the Wizard can give them what they want. But when they finally meet him, well, he’s a bit of a letdown.

Good people, bad wizards

The Wizard explains that he’s not a real wizard at all but accepted the job for financial reasons.

“I think you are a very bad man," says a clearly disappointed Dorothy.

"Oh, no, my dear,” replies the Wizard. “I’m really a very good man, but I'm a very bad wizard, I must admit.”

I’ve always thought the Wizard of Oz as a perfect way to explain the true value of financial advice.

Traditionally, financial advisers have been seen as having almost supernatural powers. They were expected to predict an unknowable future, to time the ups and down of the stock market, and to identify, in advance, which stocks, or funds, countries or sectors will outperform. The evidence shows us, time and again, it can’t be done.

That doesn’t stop people believing otherwise.There are even many advisers who think they have those powers, or at least like to give that impression to their clients. And like the Wizard of Oz, they aren’t bad people — just bad wizards!

You already have it in you

Back to the story. The Wizard "grants" the wishes of Dorothy's three friends by giving them tokens; but, crucially, he reminds them that they always had the qualities they sought.

He can’t help Dorothy, but then Glinda reappears and tells Dorothy the same thing; in other words, she always had the power to return home, but had to find that out for herself. Magically, Dorothy is transported back to real life and wakes up in bed at home.

Again, the story provides us with a helpful way of viewing financial advice. There’s no magic to successful investing, no secret sauce we need to go to an adviser or anyone else for.

Yes, we need plenty of time — at least ten years — to see a positive outcome. But we don’t have to do anything clever, or possess any special insight; we simply need to stand back and let the capital markets do their thing.

No, it’s not always easy. There are bound to be times when we’re tempted to succumb to emotions such as fear and greed. But we have it within us to control those emotions. The adviser’s job is primarily to encourage us to stick to the path, to remind us of the goals we’ve set ourselves and to point out the inevitable pitfalls along the way.

So, find yourself a good adviser. Yes, you're looking for good people. It's the would-be wizards you need to steer clear of.

We hope you enjoy this video, which helps to explain the point we're making: https://www.youtube.com/watch?v=7aOqkKyWVYw For more videos like this, visit the website for the author and financial educator Patrick Geddes.