Bears and bounces and biases…Oh my…again!

Markets are down 20 per cent year-to-date and there is lots of talk of a coming recession, leaving many investors concerned about their portfolios that have not been immune to the decline. Even working with an investment advisor likely did not protect investors from a significant decline in their portfolios.

And so many have probably wondered – does it make sense to pay more to work with a financial advisor if they can’t fully protect my portfolio?

The bottom line is that financial advice and investment advice are one component of wealth management.

Investors who work with an advisor for wealth management accumulate 3.9 times more assets, after 15 years, than those who do not. Wealth managers help investors accumulate wealth in four primary ways:

1. Wealth managers help investors from making typical behavioural mistakes.
2. Wealth managers know that it’s not what you make but what you keep that’s most important and by emphasizing the tax efficiency of investors’ portfolios and withdrawals, wealth managers maximize their clients’ wealth accumulation potential.
3. Wealth managers help investors develop a financial plan and stick to it.
4. Wealth managers understand that investment risk isn’t the only risk that can take a plan off-course.

Given that managing our behaviour can be the biggest challenge in times of crises, when emotions are running high, this post will focus on the role of a wealth manager as a behavioural coach.

Behavioural biases

There are many biases that cause our judgments and decision to be irrational. A few of the common behavioural biases that have an impact on investment decisions include the following:

• Availability bias is the tendency to focus on information and examples that are more vivid and believe they are more representative. A year into this bear market, market downside is starting to feel the norm and investors are becoming fearful of deploying cash to the markets. However, between 1926 and 2019, U.S bull markets have lasted much longer (6.6 years on average) than market downturns (1.3 years on average) and returns have significantly overcome the periodic market decline.
• Confirmation bias is the tendency to seek out or put more stock in information that confirms our existing beliefs while ignoring information that conflicts with our beliefs. For investors, this may lead to a desire to concentrate in a certain position or a decision to liquidate a position based on narrow information that aligns with their beliefs.
• Since the pain of loss and hurt have greater impact than pleasure, we allow our aversion for pain to disproportionately influence our thinking. This is known as negativity bias. When markets are dropping, many investors have the instinct to sell to avoid seeing their investments drop lower even though it is the act of selling that converts paper loss into a realized loss.

Most decision-making is not made with careful deliberation. Rules of thumb and mental shortcuts are regularly relied on for quick decision-making during routine tasks, and since they are ingrained, these shortcuts often spill over into other decision-making processes with more significance, including the decisions around investments.

How a wealth manager can help you

How do wealth managers help prevent investors from making typical behavioural mistakes?

1. 1. We follow a systematic investment plan. This can include regular contributions and systematic investing. The goal is to reduce the impact of market volatility-driven emotion in the investment process.
   2. We objectively rebalance your portfolio on a regular basis. If one portion of the portfolio is growing out of proportion to the other asset classes, we’ll trim and rebalance. This can be done systematically at regularly scheduled intervals, as well as manually. Over the long run, rebalancing will help capture gains and reduce volatility in your portfolio.
   3. When the market falls, many investors are tempted to sell off and move to cash. We know that staying the course will, in the long run, lead to better returns than pulling out and trying to time re-entry. Missing just the 10 best days of the S&P500 index over the period 1992-2021 resulted in 26 per cent lower returns. We coach investors to stay the course.
   4. We can reframe volatility as an opportunity by using a cash deployment rule for the portfolio. For instance, if the market drops by a certain percentage, we will invest a predetermined cash balance taking advantage of low prices.
   5. We help investors overcome their home-country bias and ensure that their portfolios are properly diversified.

How you can help yourself

While working with a wealth manager can go a long way in mitigating behavioural biases, it takes two to tango. There are measures you can take to help yourself overcome your own biases.

1. Your wealth manager or a trusted expert may be able to shed some light on behavioural mistakes you are making and help you devise strategies to avoid them.
2. If you are finding yourself overwhelmed by emotion, take a break. Sleep on it or give it a day or two before making an investment decision.
3. Reduce media intake—this can reduce availability bias and other biases.
4. Try and think of your future self. Really try and picture how you will be living and how the decision you make today will impact your ability to achieve your long-term goals. Thinking of your future self reinforces the long-term perspective and reduces the risk of being lured off course or reacting to short-term market moves.
5. Extend the long-term perspective. Most bull markets last 6-8 years. Most bear markets last 1-2 years. Your investment lifetime will likely span 60 years. How important are recent market moves, either up or down, on a 60-year journey?

Visit our website if you’d like to learn more about becoming a wise behavioural investor.

Maximize your wealth. Live the life you want.

You work hard to save for the life you want. A wealth manager can help you work towards your goals not only through investing your money but through tax efficient accumulation and withdrawal of assets, financial planning to achieve better savings, creation of positive investment habits and mitigating risks to your earning potential.

If you have any questions about working with an advisor or how to evaluate whether you are benefiting from true wealth management, you can reach me at Joelle.Hall@RichardsonWealth.com.

The opinions expressed in this report are the opinions of the author and readers should not assume they reflect the opinions or recommendations of Richardson Wealth Limited or its affiliates. Assumptions, opinions and estimates constitute the author’s judgment as of the date of this material and are subject to change without notice. We do not warrant the completeness or accuracy of this material, and it should not be relied upon as such. Before acting on any recommendation, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice. Past performance is not indicative of future results.

Richardson Wealth Limited, Member Canadian Investor Protection Fund. Richardson Wealth is a trademark of James Richardson & Sons, Limited used under license.