Why does your advisor tell you to stay the course in a crisis?
It’s difficult to stay calm when your investments are collapsing due to COVID-19. Some people are tempted to sell; others are tempted to jump on apparent opportunities. Yet history has shown that in times of extreme volatility, it’s generally better to . . . do nothing at all! Here are four elements of behavioural finance that you can discuss with your advisor to better understand the current situation.
Markets are greatly influenced by emotions
“Behavioural finance tells us that the markets are controlled by fear and greed. Both are exacerbated these days, hence the current extreme volatility. When a security falls, some think it will continue to fall, while others think it will go back up, but the reality is, nobody knows,” says Lawrence Kryzanowski, a professor of finance at Concordia University’s John Molson School of Business.
Your emotions are short-term, and your investments are often long-term
“ In timesof crisis, short-term emotions are likely to get in the way of investors' long-term objectives. Fear, anger and frustration drive them to do things to make them feel better in the short term, and they lose sightof the long-term returns and risks. But it's possible to resist these emotions if you have financial literacy and with the help of a professional advisor,” believes Prof. Richard Guay of ESG UQAM, the holder of the AMF Finance Montréal Research Chair.
Speculation should be left to speculators
“The recent sharp falls in the markets are mainly due to hedge funds and institutional investors, who bet on volatility and are willing to take short-term losses because they trade every day,” says Prof. Kryzanowski. “But individual investors with a long-term investment horizon should avoid liquidating assets in the current context.”
“Investors who want to bet on volatility in the current context fall prey to a behavioural bias, because the result will depend more on luck than skill,” says Prof. Guay. “Every time we think we have to sell, there is someone on the other side who believes just as firmly that it’s time to buy. Who is wrong or right? People are unlikely to find the answer without professional help.”
It’s important to keep a cool head
“A certified advisor’s job is to help investors take a step back and maintain an appropriate asset allocation throughout the crisis. The reason they established your investor profile and diversified your investments was specifically to deal with this kind of situation. As long as your portfolio is well balanced, it’s quite possible that your advisor recommends that you do nothing at all,” Prof. Guay concludes.
Don’t hesitate to ask your advisor about the impact of market movements on your assets. But be sure to share your concerns too. Informing and reassuring you is part of their job, as are explaining complex concepts, helping you stay focused on your projects and guiding you to decisions that are right for you.
COVID-19 and Your Finances: Talk to an Advisor, Not Your Brother-in-law
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