Wealth planning issues of various kinds have been a real feature of our conversations with High Net Worth Individuals in recent weeks.
Greg Davies, Head of Behavioural Finance at Oxford Risk, offers some much-needed advice for investors to help them avoid expensive mistakes and gain some vital emotional comfort in troubled times.
As with all previous crunch points, the coronavirus crisis currently engulfing the world has highlighted just how much economics and investments are bound up with human emotion. Combatting the influence of irrational “animal spirits” on either the global or individual scale is no easy task.
For individual investors, staying invested – or even putting uninvested cash to work when others are running for the exits – calls for significant discipline and emotional hardiness that come sorely under pressure. Thus, one of the most important roles of the professional adviser is to serve as a rational, disciplined guide through a wealth-building journey that may take many twists and turns. It’s actually useful to think of your adviser as a wealth “coach”, who can provide much needed emotional comfort as well as preventing the kind of missteps that might be made in the heat of the moment and seriously damage your long-term plans.
Greg Davies, Head of Behavioural Finance at Oxford Risk, is a renowned expert on how human psychology contributes to the success, or failure, of investment strategies. Here are his tips on coping with the crisis:
First remember that investors only make or lose money when they actually sell investments.
“Realise that in all likelihood a large proportion of your current investments are not needed for essential expenditure in the near future,” he says. “The lowered valuations of these assets is not important, only the value when you need to withdraw years in the future. You’re much better to sit tight and wait, rather than to exit when markets are down.”
This is why it is absolutely vital to get the liquidity profile of your portfolio correct (this being the ease with which investments can be turned back into cash). You must avoid being a “forced seller” of assets at a time their value has fallen.
There is no doubt that the current crisis is of unprecedented magnitude, but Davies’ next piece of advice is that investors should stop tormenting themselves by staying glued to the minute-by-minute news flow. Financial liquidity is vital, but so is emotional liquidity. In times like this many people lock in long-term losses despite not being in any way a forced seller for financial reasons. We need to conserve our emotional liquidity and this means self-isolating from unnecessary market information.
We need to conserve our emotional liquidity and this means self-isolating from unnecessary market information
“Try to avoid watching the markets day to day as this will just increase your anxiety to no useful end,” he says. “Inevitably, there will be dramatic movements which are entirely unpredictable. Given you can’t control, or predict them, you should also strive not to worry about them, and exclude them from your long-term decisions.”
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“With market conditions as they are currently, it is good to remember that everyone around you is focused on the short term,” Davies says. “That ramps up the potential rewards available to those who can be patient and keep their focus on the long-term future.”
It may not feel like it, but today’s market carnage could have the makings of a brighter financial future for savvy investors, he continues: “Viewed from a long-term perspective, financial assets have all just gone on ‘sale’ and could be snapped up at a large discount to normal prices.”
Viewed from a long-term perspective, financial assets have all just gone on ‘sale’ and could be snapped up at a large discount to normal prices
Of course, buying assets at the most attractive prices is one of the key responsibilities of a professional wealth manager and so those with an adviser in place can expect them to be looking at opportunities to buy undervalued assets already.
For those who have wealth that needs to be put to work, now could be a great time to “buy at the bottom”. However, first-time investors should be very wary of simply piling in. Positioning investment portfolios well for the months and years ahead has never been more complex and robust asset allocation will be key.
Taking a long-term view makes it easier to see the current crisis as an anomaly that will eventually be recovered from. However, many investors will want to be extra-prudent financially, at least in the near term. Here, Davies advocates discipline and clarity of vision, both in terms of what to spend and which assets should fund that spending.
“Focus on the things that you can control: I would advise postponing discretionary spending wherever possible and putting inessential financial goals on the backburner for the time being,” he says. “Then, if you find that you do need to withdraw money from your investment portfolio, ensure you sell your assets intelligently.”
The composition of your investment portfolio, your other assets, broader situation and tax exposure all need to be taken into account here. A wealth management adviser will be invaluable in helping you make these finely calibrated decisions, but Davies’ broad advice is to “start with cash, then move to bonds as these will now make up a relatively larger portion of your portfolio than they did before the drop.”
In times of crisis, there is a natural impulse for us to feel that we are taking action. However, it is vital that investors recognise this feeling and turn it to good account, rather than allowing themselves to make reactive (and likely irrational) moves.
“Use this time as an opportunity to take stock of your long-term financial plans,” Davies advises. “This will help assuage your need to be feeling you are doing something right now, while also anchoring you emotionally on a longer time horizon.”
Solid principles though these may be, we know only too well how difficult it can be to actually put them into practice. When panic ensues, even the best-laid plans can go awry. We are only human, after all.
Having a professional adviser on your side will add huge value in the best of times, but at the worst they become invaluable. Whatever your situation, you don’t have to go it alone. And, although social distancing may be in place for a while, you can still get expert advice from a real person. The leading wealth managers on our panel are all using new technologies, and the good old-fashioned telephone, to maintain excellent client service in these difficult times.
If you are feeling the need for some comfort and control, take advantage of our free, fast matching service. Access to a great adviser is literally at your fingertips.