Managing Emotions During Downturns

August 15, 2022 | Michael Tse


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Emotionally Charged Decisions

Throughout the year, our team has published numerous market related blogs to ensure clients are well informed of our market outlook. Needless to say, this year has been difficult for investors with the markets facing such extreme volatility.

Naturally, investors do not like to see their portfolios decline in value, but a recovery can become difficult to achieve if decisions are made out of emotion and fear. In search of short-term relief, decisions could be made that may impede the achievement of one’s long-term objectives. To stay on track of your long-term goals, it is critical to remain level-headed. The first step is to admit that one’s emotions and even investment outlook can be highly dependent on the current trend of the market. Even the most seasoned investors fall prey to this association.  Below is an illustration that may represent an investor’s mood given the position of the market cycle.

To better manage your emotions, here are a few suggestions to keep you focused on your long-term goals:

1) Focus on the big picture: There will always be short-term fluctuations that can temporarily fast-track or delay achieving one’s financial goals. Over a longer period of time, these moments of outperformance and underperformance can be smoothed out. In periods of heightened volatility, the key is to understand whether the experienced downside will actually derail your ability to achieve that long-term goal. Having a financial plan that performs a sensitivity analysis by incorporating differing degrees of market corrections in its forecasts will provide investors with an objective view of how much downside their portfolio can afford before a goal is in jeopardy.   Making reactionary investment decisions may have long-term negative implications. Rather, investment decisions should be based on the ‘big picture’ – long-term goals, liquidity needs, risk profile, time horizon, and sufficient levels of diversification.

2) Avoid checking your portfolio on a daily basis: Many people are guilty of checking their portfolios daily during periods of volatility. This can take a heavy toll on one’s emotions. Market turning points tend to coincide with technical and fundamental milestones being met. Investors should understand that this often takes time. Sometimes, the absence of a quick turnaround can demoralize investors and cause them to inaccurately extrapolate the current trend into a systemic longer-term problem. Surely, checking one’s account values will not help turn the market higher. In our view, investors need to determine whether a logical path for a recovery exists.  Often times, this path involves technical and fundamental milestones that should be achieved. Tracking these indicators will ultimately be more productive than simply tracking one’s portfolio values.

3) Consult an advisor:  An advisor does not have a crystal ball, but their job is to provide relevant information during difficult times in the market. Often, they can provide historical context and perspective to the degree in which a market is oversold or overbought. As mentioned above, advisors can help define what that logical path to recovery may look like and identify which indicators to track. Markets tend to overshoot in either direction, and successful advisors can help clients set expectations from a more moderate position. Overall, an advisor’s objective is to keep you on track to reach your financial goals by helping you make disciplined investment decisions.

Your wealth plan should remain on track even during uncertain periods in the market. A custom investment portfolio should be constructed by taking into account the maximum drawdown that can be afforded before a financial goal becomes out of reach. Hence, we feel that an investment plan and a retirement/financial plan can be done together to ensure they complement one another. Making decisions based on emotions or the fear of losing money can make attaining a goal more difficult. Work with an advisor who can assist you in making measured investment and planning decisions. This may yield you the patience that is often required during market downturns.

 

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