In recent years, the market experienced relatively little volatility. Overall returns were high, investor sentiment was strong and it appeared as if the bull market would run forever. But this year the market returned to a more normal state — where certain sectors rise and fall and security selection is more important.
When markets get turbulent, when volatility increases, when interest rates are poised to rise and there is greater uncertainty, people often panic about where to invest their hard-earned money – and often forget about the importance of creating and sticking to a financial plan designed to meet their current and future needs.
Don’t invest based on emotion
It turns out that many of our reactions to market ups and downs are hard-wired. Behavioural economists have been studying how fear and loss impact investor actions in the market and they have a name for this normal, fearful, psychological phenomenon. They call it loss aversion. Put simply, behavioural economists now recognize that if a person were to find a dollar on the sidewalk they’d get a momentary thrill. But if that same person were to lose half that amount, say through a hole in their pocket, the loss would be felt more intensely than the thrill of finding the dollar. As Robert Koppel explained in his book, Investing and the Irrational Mind, “People naturally have this fear of losing money, and it affects what would otherwise be rational judgment.”
Behavioural scientists and financial experts say this and other phenomena can lead to poor investment choices. For instance, availability bias is our tendency to overreact to an attention-grabbing event — such as a one-day stock market loss. Rather than ride out the paper losses, investors panic and start selling, only to watch as the market begins to soar again a few months later.
Then there’s the disposition effect, where investors tend to sell their winners, to lock in their gains, and hold on too long to losing stocks, in the hopes they will rise again.
The power of advice
So how can we resist these behavioural tendencies? One of the best ways is to work with a financial advisor. Not only can they curb the fight-or-flight response that can threaten to derail a client’s financial well-being, but they can provide a more holistic view – helping to address long-term planning, navigate complex tax issues and offer investment choices suitable to a client’s overall goals.
An advisor can even help investors see market volatility from a ‘glass half full’ perspective. “A financial advisor can help an investor see potential buying opportunities,” explains Mark Brisley, Managing Director and Head of Dynamic Funds.
“Research shows that people who are working with a financial advisor tend to do better financially,” explains Mr. Brisley. In fact, households with an advisor for 15 years or more accumulated 290 per cent more assets — almost four times as much — than equivalent non-advised households, according to a 2016 study by the Centre for Interuniversity Research and Analysis on Organisations (CIRANO) Institute. Satisfaction rates are just as high, with 71 per cent of North Americans polled for BlackRock’s 2017 Investor Pulse Survey saying they were “highly satisfied” with their financial advisors.
Trust your gut – except when investing
“The expression ‘time is money’ becomes more and more applicable particularly as we age and our financial goals become more complex,” says Mr. Brisley. Despite a long career in the financial industry and intimate knowledge of the markets, Mr. Brisley relies on his own financial advisor to manage his active investments, because he knows that to effectively manage your own investment portfolio you need not just knowledge, but time, patience and the fortitude to ignore your emotional biases and follow your investment plan.
Despite the uptick in self-directed or online investing, “most don’t want to go it alone,” says Mr. Brisley.
“I think there is a misconception that financial advisors are just about the returns. This is still a big part of the package,” explains Mr. Brisley, “but it’s more about the holistic picture of a client’s life.” A financial advisor can help people feel more secure for retirement, help them feel more confident about their financial status and coach them through panic-inducing market ups and downs — and that goes way beyond a portfolio’s annual return.
Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. Views expressed regarding a particular company, security, industry or market sector are the views of the writer and should not be considered an indication of trading intent of any investment funds managed by 1832 Asset Management L.P. These views should not be considered investment advice nor should they be considered a recommendation to buy or sell. Dynamic Funds® is a registered trademark of its owner, used under license and a division of 1832 Asset Management L.P. ™Trademark of its owner, used under license.
This content was produced by The Globe and Mail’s Globe Content Studio, in consultation with an advertiser. The Globe’s editorial department was not involved in its creation.