As I write this, the dust is settling after a tough Game 7 loss for the Canucks in the western conference semi-finals against the Edmonton Oilers. While it’s a disappointing end to their playoff run, the series has been a captivating study in risk management, resilience, and adaptability – principles that directly apply to our world of investing.

This Canucks team isn't just about individual star power. They've embraced a disciplined, structured, and adaptable style of play. They understand when to prioritize defense and when to seize offensive opportunities. They're not reckless gamblers; they're calculated risk-takers. This reminds me of a fascinating concept from the book "Deep Survival" by Laurence Gonzales: risk homeostasis. It suggests that we all have an innate "risk thermostat". When we feel safer, we unconsciously take on more risk to maintain our desired level. It's like a kayaker choosing a more daring route when the water is calm, but opting for a cautious path when the current is strong.

You might be wondering how kayaking relates to your investment portfolio. The truth is, we often see this same behavior in investors. When markets are smooth sailing, we tend to get bolder. But when volatility strikes, we instinctively pull back. It's a natural human reaction, rooted in our survival instincts. Unfortunately, this knee-jerk reaction can be detrimental to our long-term financial well-being.

Key Market Observations and Lessons

• The S&P 500 Pendulum: We've seen dramatic shifts in investor sentiment towards US investments over the years, highlighting how perceptions of risk can change rapidly. I can recall quite vividly after the financial crisis when I had to practically beg clients to add to US stocks in their portfolio, given that they had a terrible run since the early part of 2000 to roughly 2011 for Canadian investors, as TSX dramatically outperformed and the USD sagged to CAD.
• Corrections and Calls: Market downturns often trigger panic selling, but history has shown that these can be excellent buying opportunities.
• The Rise of "All-In" Investing: The popularity of low-cost index funds has led to increased concentration risk for some investors.
• Right Here, Right Now: Even as markets perform well, we're seeing a tendency for investors to chase returns by increasing stock allocations, potentially neglecting the importance of diversification.
• The Dalbar Study: This study reminds us that the average investor underperforms the market due to emotional decision-making, attempts at market timing, and high fees.

Behavioral Biases: The Enemy Within

It's a classic case of what the financial writer Jason Zweig so aptly put: "When it comes to investing, we have met the enemy, and he is us." Excited by the prospect of quick profits and terrified of potential losses, we allow our emotions to hijack our rational decision-making, often leading to disastrous outcomes.

This phenomenon isn't new. Renowned financial advisor Nick Murray has dedicated his career to understanding and addressing investor behavior. In his book, "Behavioral Investment Counseling," Murray emphasizes that our emotions are often our worst enemy when it comes to investing. We tend to buy high when optimism is rampant and sell low when fear takes hold.

Strategies for Success: Behavioral Principles and Portfolio Practices

To counteract these biases and achieve long-term success, we must embrace a combination of behavioral principles and sound portfolio practices:

Behavioral Principles:

1. Faith in the Future: Believe in the long-term growth potential of the markets, even during downturns.
2. Patience: Resist the urge to make impulsive decisions based on short-term market fluctuations.
3. Discipline: Stick to your investment plan and avoid emotional reactions to market events.

Portfolio Practices:

1. Asset Allocation: Determine the appropriate mix of stocks, bonds, and other assets based on your risk tolerance and goals.
2. Diversification: Spread your investments across different asset classes and geographies to reduce risk.
3. Rebalancing: Monitoring your asset allocation is important and portfolios should be rebalanced back to your desired asset allocation as needed – taking advantage of market fluctuations.

The Importance of Adaptability

Investing is not just about numbers and spreadsheets. It's about understanding ourselves, our emotions, and our inherent biases. By recognizing and addressing these behavioral tendencies, we can make more rational decisions and ultimately achieve our long-term financial aspirations.

Remember, just like the Canucks adapt their game plan based on the situation, we need to be flexible with our investment approach. It's not about eliminating risk; it's about managing it intelligently and making informed decisions that align with your financial goals.

As always, we’re here to help you navigate the complexities of the market and make sound financial choices. Don't hesitate to reach out if you have any questions or concerns.

Sincerely,

Marc Correia, CFA, CFP
Senior Portfolio Manager & Wealth Advisor

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