As I write, the world’s financial markets are experiencing their worst begin to a brand new year ever. As is a fact of life during the most turbulent times, there is truly nowhere to cover. Not in China. Not in Europe. Not in the U.S. And many definitely not in Canada.
‘Ocean of fear’: Canadian investors sitting on record cash pile risk billions in lost returns
Investors are watching as a large area of the gains earned during a bull market that lasted almost seven years wither before their eyes. It is not easy for those not endowed with investing superpowers to harness the intellectual side of the brain that tells them “these things happen,” instead of giving to the more visceral flight reaction of “how will i get off?”
Advisers across Canada are, no 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 customers that volatility within the markets is a very common side effect of investing and that “this, too, shall pass.” They will also remind them they covered all this in numerous meetings on risk tolerance, and that the clients were totally sanguine concerning the possibility of enduring short-term losses within the pursuit of long-term gains. Furthermore, they will remind these clients that the most amateurish move of all is to find into rising markets then sell into falling ones.
Still, the advisers’ admonitions and protestations notwithstanding, a number of these clients will indeed “tap out,” because they simply can’t go anymore. They’ll, not less than a short time, be insulated in the possibility the worst is yet to come, but also impotent to capture future gains as markets eventually submit their favour.
How Canada is flirting having a bizarro world of negative interest ratesThe number every China stock investor is watching as rout deepens
This phenomenon – one that has played again and again more times than an auto-reverse mixed tape in 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 of the present.
None of us can predict how we will react during a time of extreme stress if asked when all is calm.
This is why individuals who are confronted with high-stress situations in their professional lives (think astronauts, soldiers, police officers, and hostage negotiators) try to get trained in an environment that simulates the situations in which they’ve already to make life-and-death decisions in only seconds.
When advisers meet with their clients to discuss their risk tolerance and investing objectives, they frequently do so in comfortable environments, cappuccino in hand, participating in conversation in dulcet and very rational tones.
It is in these meetings these clients claim that they can understand the notion of risk and volatility, pledging to not freak out when their investing ride gets turbulent. By accepting these pledges with no fight, advisers are in fact doing these clients a disservice, since almost all 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 produce the sort of emotions that investors are experiencing when markets are out of balance, there is another method of testing one’s mettle when underneath the gun: real life.
Although it’s past too far let’s focus on you to definitely return over time and modify your volatile equity-laden portfolio to a more conservative balanced portfolio (or even one all in cash), this can be done: take a seat in front of your computer, open a brand new document, and call it “Letter to myself from the eye from the storm.”
Write down everything you’re experiencing at this time. Your fear. Your denial. Your desperation. Don’t leave anything out, the part in which you realize that what you’re experiencing can not be explained logically, but that you still feel it nonetheless.
And when you sit down together with your adviser following this storm has transpired, bring the letter with you. When she asks you about your tolerance for risk, take out the letter and read it. Out loud. Then use her and say “THAT is my tolerance for risk.”
It could trigger a modification of the portfolio which will significantly reduce your long-term returns and can even need a rebalancing not only of the investments but of your plans for retirement.
But it will also give you a peace of mind that only 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 ready for this. You realize your true risk tolerance. And you won’t need anyone telling you that “everything is going to be all right.” Because it already is going to be.
David Kaufman is president of Westcourt Capital Corp., a portfolio manager specializing in traditional and alternative asset classes and investment opportunities. He can be contacted at [email protected].