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Memories Can Be Costly to Your Clients Investment Decisions

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Memories Can Be Costly to Your Clients Investment Decisions

‘Memories are made of this …’ runs the refrain from a mellow Dean Martin song that I played as the DJ at Friday night sock hops at my high school. The song was a rendition of happy times. The subtext of the song was that we keep sentimental memories and that pleasant times of bygone years stay with us permanently and overhang our view of life.

That kind of memory can be very rich and comforting and sometimes even the trigger for the occasional wry smile. It can even be comforting in a time of stress.

However, while that kind of memory can be emotionally satisfying, memories of market volatility and tumult can be intimidating and even indirectly costly. Many individuals bring negative memories to their investment decisions and that can mean a challenge for their financial advisors.

Memories of the financial crisis and crash of 2008 continue to overhang the attitudes of some investors, even now in 2019, explains Jay Nash, Senior Vice-President, Portfolio Manager and Investment Advisor at the London branch of National Bank and a 21-year veteran of the financial sector.

For many, the word ‘correction ’evokes memories of the 2008 disaster. That can lead investors to give up returns in favor of playing it safe with downside protection. In the long run this works against them, Nash argues, suggesting that many individuals are “hard wired” to feel loss more than gain.

During the market plunge last December, many investors did not see the selloff as an opportunity, although the world seemed ‘to be on sale’. Some wondered whether we were headed for a repeat of the 2008 crash since those memories had only partially faded. Many felt that there was more downside to come, playing it overly safe as they were driven by an emotional response to protect against further losses, Nash explains.

For some investors, this leads to behaviors, sometimes short-term in duration, that cause them to be overly protective in investment decisions despite opportunity.

Perhaps there is an element here of history repeating itself.

The great depression burned a hole in the minds – and the financial judgements – of many who lived through it and the ‘great recession’ of the last decade has had a similar effect on many individuals who lived through it. That is certainly understandable if we recall the huge drop in portfolio values that broke the faith of many investors in the stock market, their advisors and corporations in 2008. That memory drives fear around an eventual major correction, Nash says.

Related: Why You Need to Invest More Than Money with Your Advisor

In fact, some individuals who were raised during that time period remember the impact of the 2008 crisis on their parents and have come to equate equities with stress on their parents.

Combined with those memories, we have improved transparency, due at least in part to greater media coverage, and improved liquidity due to lower trading costs and exchange traded funds. That has increased the tendency of some investors to respond to short-term events and economic data. That in turn means that market volatility is likely here to stay, Nash says.

All of that, combined with plunges in specific blue-chip stocks such as SNC Lavalin, Boeing and GE. may also play part in the fears of some investors who could be quietly asking ‘If GE gets this messed up, what is safe anymore?’

For a professional advisor, this means first convincing the client of the importance of a consistent, unemotional approach to investing and then following through with recommendations and guidance that fit that bill, Nash says.

Depending on the specific situation, this could mean keeping the focus on long-term goals and the agreed-upon asset allocation. In some cases, it could mean adjusting the asset allocation. This dimension of the advisor-client is important because, except for the U.S. China trade dispute, all of the geopolitical, financial and economic factors that have caused the recent volatility will continue indefinitely. Even the trade dispute could continue for for some time.

Disclosure: I do not hold any shares in any of the companies mentioned in this article and have no plans to purchase any of them.
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