Behavioral Advisor Perspectives and Practices: Responding vs. Reacting
Our primary objective at Athena is to generate long-term performance for our clients. A major contributor to that end is avoiding costly mistakes or compounding an already difficult situation. Beneficial long-term decisions often feel counterintuitive at the time, but don’t underestimate the value of a steady hand when things seem the most grim.
The stress and pressure to act can be overwhelming. We recommend thoughtfully approaching and prioritizing actions as follows:
- Assess immediate 30 to 90-day cash needs and do only what is necessary to meet them.
- Sticking with the client’s long-term investment plan is the best option. However, if it becomes necessary to make portfolio allocation changes, consider taking the portfolio’s cash position to 15%. Raise the necessary funds from whatever part of the portfolio allocation has declined the least. Taking small, measured actions can relieve stress and can help avoid more costly mistakes at market extremes.
- Delay periodic rebalancing for a full cycle and evaluate any further decisions at that time.
Once you have made your decisions and taken action, you can redirect your focus to other matters and begin to focus on reframing, healing and recovery.
View current markets in a larger historical context:
- While a 30% to 40% decline seems daunting now, the average decade since 1930 has an 204% unannualized return, which includes a -41% bear market and one or two recessions.
- Every bear market that has ever occurred was front-loaded with terrible news and dismal returns. But every bear market contained enough positive returns on the back end to make up for the loss. We have only seen the first part so far.
Identify and build on positive developments. Some factors which may make things better:
- The economy was strong, banks were well-capitalized, and corporate earnings were healthy going into the crisis.
- Governments are stepping in to provide support.
- Markets typically recover before the economy does.
These are uncertain times with no magic elixirs and there are likely to be strong aftershocks and turbulence for some time. We will continue to share our perspective and seek to be a positive partner as we all go through these challenging times.
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Behavioral Viewpoints features new topics each month which are intended to help advisors and investors gain a deeper understanding of how behavior shapes the investing landscape.
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The information provided here is for general informational purposes only and should not be considered an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. It should not be assumed that recommendations of AthenaInvest made herein or in the future will be profitable or will equal the past performance records of any AthenaInvest investment strategy or product. There can be no assurance that future recommendations will achieve comparable results. The author’s opinions may change, without notice, in reaction to shifting economic, market, business, and other conditions. AthenaInvest disclaims any responsibility to update such views. These views may not be relied upon as investment advice or as an indication of trading intent on behalf of AthenaInvest.
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