Severe market downturns don’t strike often, but they often undo years of hard work.
Confidence evaporates, replaced by uncertainty and fear. They prompt investors to sell at the worst possible time, locking in deep losses.
Financial planners find themselves on the front line, attempting to keep investors on the straight and narrow. It is not an easy task.
Traditional investment advice such as “remain focused on the long-term” or to “ride it out” provide cold comfort when investors are watching their portfolios fall deep into negative territory.
While there is value in maintaining a long-term perspective, it often goes completely against people’s natural instincts and inherent biases during a bear market.
Many studies have shown that despite our best intentions, most investors don’t listen to this advice. It is deep within our DNA, harking back to the earliest days of humankind, to focus on short-term survival and avoid losses.
Facts versus emotion
It’s hard to focus on what a market downturn means personally when media headlines trumpet billions of dollars in losses. While nobody knows what markets will do next, applying the facts to personal situations is much easier and provides some much-needed comfort.
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Many investors – and retirees in particular – were badly hurt during the GFC and are being hurt again as the coronavirus pandemic drags down economies and markets.
We know that retirees are particularly loss averse, but research also shows younger investors react poorly to market losses. The majority of Australians are risk averse by global standards, with 81% of investors under 35 seeking guaranteed or stable investment returns, according to the ASX 2017 Investor Survey.
Advisers have a deep relationship with their clients and understand the pain they go through during a downturn. A good Adviser will get their clients to ride this out and not act on emotion. Remember, you only lose when you sell and crystalize losses
We know that volatile markets create challenges – that’s why the most successful investors over time have not panicked and even look to increase their holdings in these times
Confidence and trust are fundamental to ensure clients feel confident and secure enough to stick with their long-term plans through a market downturn. This is where Advisers have an important role to play
MASU can help build that foundation because it has been designed to work with how clients are, not how the investment industry wishes they were.