Whether you are an active, experienced trader, or unknowingly doing so through your superannuation fund, we are all investors. In the world of investing, an individual’s emotions play a larger role than most people realise. Fear, excitement, and uncertainty can cloud judgment, leading investors to make impulsive decisions—often at the worst possible times. This is particularly true during periods of heightened market volatility, which can cause even experienced investors to panic.
‘I lost so much of my superannuation during the Covid outbreak, I just had to sell to cash for a while’ is a phrase heard all too often by advisors. On the 11th of March 2020, the World Health Organisation declared COVID-19 a pandemic. By the 23rd of March, the ASX 200 was 35% per cent below its peak seen just a month earlier on the 20th of February. An incredibly daunting thought for all investors, leading to plenty fleeing markets and retreating to cash. By just May 2021, the ASX200 recovered to again surpass its pre pandemic highs and has continued to climb since.
This poses the question; what long term value could have been placed on the role a financial advisor can play in educating clients and keeping emotions under control and rationalised?
With so much information constantly available at our fingertips, it is impossible to escape breaking global news events and everyone’s opinion on what they mean for the world. Media headlines, stirs of economic uncertainty and short-term market corrections can trigger responses from investors, commonly drawn back to emotion.
- Loss aversion: The fear of losing money is far more powerful than the joy of gaining it. This leads many investors to sell at the sign of trouble, potentially locking in capital losses. This can be illustrated during global market corrections brought on by the COVID outbreak in 2020. Investors perhaps associating the sharp reduction in markets with that of the 2009 Global Financial Crisis and fleeing from equities.
- Herd behaviour: It’s human nature to follow the crowd, even if it’s not in our best interest. When everyone else is selling, it becomes tempting to follow suit. ‘Everyone else must know something that I don’t’.
- Overconfidence: During market booms, it can lead investors viewing equities as something that can ‘make them money quickly’. This may mean taking on more risk than they should. This can lead to significant losses when markets inevitably correct themselves.
Amongst others, these characteristics can lead to investors reacting impulsively during periods of market volatility or to media headlines. This could mean selling investments during a downturn or making risky bets during a bull market. Often making snap decisions during periods of volatility can mean missing out on market recoveries, which often occur quickly and unexpectedly. Again, the global market reaction to the Covid pandemic is a fantastic example of this.
These reactions can have long-term consequences, derailing your financial and aspirational goals.
Can an Advisor Make You a Superhero?
An underappreciated ‘value add’ of having an ongoing relationship with a financial advisor, is the power of education, coaching, planning and objectivity.
- Understanding & Coaching – When things get volatile and media releases are confronting, it’s invaluable to have a financial advisor you trust who can offer objective guidance. When inevitable feelings of fear and emotions creep in, an advisor can help you refocus on your long-term aspirations and understand the movement of markets, avoiding rash decisions.
- Planning & Structure – A well-developed financial plan should be structured in a way to help manage volatility and risks so your objectives are at the forefront of your investments. This could be having clear reserves set aside outside of markets for a retiree to draw income from during times of volatility. When understood, this can help manage anxiety during market volatility as you are aware that as much as possible, you have prepared for this, and aren’t ‘at the mercy of markets’ to meet your objectives.
- Preparing You for What to Expect – Investors can often think the advertised returns of industry super funds is what they should expect year on year. This is far from the truth. However, if understood, can illustrate the importance of looking to the longer term. We are all living longer and will experience significant market downturns and numerous market cycles throughout our lifetime. A financial advisor can help you to understand the peaks and troughs of investing and the impact on your long-term outcomes. This way, when a significant downturn does occur (and it will!) you understand and are appreciative of what this means for you longer term. Whilst there will always be periods of discomfort, you won’t be tempted to make a sharp reaction that has irreparable consequences.
A strong advice relationship is built on a comprehensive understanding of your goals, risk tolerance and personality.
Market conditions are always unpredictable, but having a relationship with a financial advisor can help navigate uncertainty, give comfort and peace of mind, provide a well-developed risk management plan and help you understand how markets operate. With these tools, rather than reacting emotionally, you are better equipped to ‘stay the course’ and achieve your goals. Get in contact with your local Accru Advisor for more guidance in this situation.
"