As I write, the world’s financial markets are experiencing their worst start to a new year ever. As is a fact of life throughout the most turbulent times, there’s truly nowhere to cover. Not in China. Not in Europe. Not within the U.S. And most not at all in Canada.
‘Ocean of fear’: Canadian investors located on record cash pile risk billions in lost returns
Investors are watching as a large area of the gains earned throughout a bull market that lasted almost seven years wither before their eyes. It is difficult for those not endowed with investing superpowers to harness the intellectual side from the brain that tells them “these things happen,” rather than giving to the more visceral flight reaction of “how do I leave?”
Advisers across Canada are, without doubt, fielding calls from the best of investors grasping for explanations and wondering if it’s time for you to break the glass “in case of emergency.”
These advisers reminds their clients that volatility in the markets is a common side effect of investing and that “this, too, shall pass.” They will also remind them that they covered all this in numerous meetings on risk tolerance, which the clients were totally sanguine about the chance of enduring short-term losses within the pursuit of long-term gains. Furthermore, they’ll remind these clients the most amateurish move of all is to find into rising markets and sell into falling ones.
Still, the advisers’ admonitions and protestations notwithstanding, a number of these clients will indeed “tap out,” simply because they simply can’t take it anymore. They’ll, not less than a short time, be insulated in the possibility that the worst is yet in the future, but also impotent to capture future gains as markets eventually turn in their favour.
Related
- How Canada is flirting having a bizarro realm of negative interest ratesThe number every China stock investor is watching as rout deepens
This phenomenon – one which has played again and again more times than an auto-reverse mixed tape from the ’80s – may be the classic product of this part of the human condition that stops us from being able to channel our future irrational selves when cloaked within the rationality and security from the present.
None of us can predict how we will react during a duration of extreme stress if asked when all is calm.
This is the reason why individuals who are faced with high-stress situations as part of their professional lives (think astronauts, soldiers, police officers, and hostage negotiators) try to train in an atmosphere that simulates the situations in which they’ve already to make life-and-death decisions in mere seconds.
When advisers meet with their customers to go over their risk tolerance and investing objectives, they frequently do so in comfortable environments, cappuccino at hand, participating in conversation in dulcet and incredibly rational tones.
It is within these meetings these clients claim to appreciate the perception of risk and volatility, pledging to not panic when their investing ride gets turbulent. By accepting these pledges without a fight, advisers are actually performing these clients a disservice, since many of the clients, while not knowingly lying, are certainly not in contact with their fearful and less rational selves when making such proclamations.
While I don’t know associated with a flight simulator that exists to create the type of emotions that investors are experiencing when financial markets are out of balance, there is another way of testing one’s mettle when underneath the gun: actual life.
Although it’s past too far let’s focus on you to return in time and modify your volatile equity-laden portfolio to a more conservative balanced portfolio (or perhaps one all in cash), this can be done: take a seat before your pc, open a brand new document, and call it “Letter to myself in the eye from the storm.”
Write down everything you’re experiencing right now. Your fear. Your denial. Your desperation. Don’t leave anything out, even the part in which you realize that what you’re experiencing can not be explained logically, but that you still feel it nonetheless.
And whenever you sit down with your adviser after this storm has transpired, bring the letter with you. When she asks you about your tolerance for risk, take out the letter and browse it. Aloud. Then use her and say “THAT is my tolerance for risk.”
It could trigger an adjustment of your portfolio that will significantly lower your long-term returns and might even require a rebalancing not only of the investments but of the plans for retirement.
But it will also provide you with a peace of mind that just knowing your true self will bring.
The the next time the beast that is the market bears its fangs, you’ll be able to relax. You’ve prepared for this. You know your true risk tolerance. And also you won’t need anyone suggesting that “everything will be just fine.” Because it already is going to be.
