The markets entered correction territory this month as uncertainty over the economy due to tariff threats took hold. Investors’ portfolios participated widely in this drop and working with an investment advisor likely did not fully protect you from a decline in your portfolio.
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 3.9X more assets, after 15 years, than those who do not. Wealth Managers help investors accumulate wealth in 4 primary ways:
- Wealth Managers help investors from making typical behavioural mistakes.
- 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.
- Wealth Managers help investors develop a financial plan and stick to it.
- 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 judgements 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. Since Trump took office, many of us have been consuming more news, with media focusing on the more extreme headlines and data to keep our attention. While these images may make investors fearful of investing, the reality is, most publicly traded companies will survive the economic uncertainty, even if earnings are significantly down in the coming quarters.
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?
- 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.
- 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. Over the long run, rebalancing will help capture gains and reduce volatility in your portfolio.
- 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 1995–2024 resulted in 54% lower returns. We coach investors to stay the course.
- 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.
- 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.
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.
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.
Reduce media intake—this can reduce availability bias and other biases.
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?
No matter the financial question you are grappling with, reach out to your wealth advisor for advice – true wealth accumulation is about more than investment selection.
If you have questions about wrapping financial planning and tax advice around investment management to maximize your wealth-building potential, you can reach me at Joelle.Hall@RichardsonWealth.com
Hall Wealth Counsel specializes in tax-efficient portfolios and planning. We help you simplify your wealth so you can do what you love with the people you care about.
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.
Links to other websites or references to products, services or other publications other than those of Richardson Wealth Limited do not imply the endorsement or approval of such websites’ products, services or publications by Richardson Wealth. Richardson Wealth makes no representations or warranties with respect to, and is not responsible or liable for, these websites’ products, services or publications. publications other than those of Richardson Wealth Limited do not imply the endorsement or approval of such websites’ products, services or publications by Richardson Wealth. Richardson Wealth makes no representations or warranties with respect to, and is not responsible or liable for, these websites’ products, services or publications.
Richardson Wealth Limited, Member Canadian Investor Protection Fund. Richardson Wealth is a trademark of James Richardson & Sons, Limited used under license.
