I remember reading a Sun Life Financial survey that found that most people tend to turn to their friends and family for financial advice before consulting advisors. I wonder if that holds true in volatile markets like we saw last week. Even as robo-advisors (automated investment platforms) establish a foothold in the industry and self-help financial books continue to proliferate on bookstore shelves, I’d argue that today, more than ever, working with a trusted advisor delivers exceptional and essential value.
Today, there’s no doubt that investors have questions. In fact, as the Dow Jones Industrial Average declined an unprecedented 1,000 points at the opening on Monday, August 24th, do-it-yourselfers sought guidance. The Investment News reported that Vanguard’s Personal Advisor Services unit, which offers investors who use automated investing the opportunity to speak to a live advisor by phone, had experienced 9% higher requests for client consultations. And, describing how robo-advisors took to Twitter to calm clients, the article notes, “When client Kartika Ruchandani, a software engineer according to LinkedIn, tweeted that her portfolio looked hopeless, the robo-advisor Wealthfront replied saying, ‘Although it can be difficult, it’s important to keep a long-term view.’”
Yes, maintaining a long-term view is important, but who knows whether that message was delivered before the worried investor began making emotionally driven trades.
Without behavioral coaching from advisors, investors often make emotional decisions driven by fear or greed. This leads them to sell low when the media warns of ongoing volatility and to buy high just as everyone climbs onto the same bandwagon. The annual Dalbar Studies tracks the actual returns earned by investors by analyzing mutual fund purchases and redemptions throughout the year and reports annually on the differential between the returns of individual investors and the market. In 2014, the firm found the following:
- The average equity mutual fund investor underperformed the S&P 500 by a wide margin of 8.19%. The broader market return was more than double the average equity mutual fund investor’s return (13.69% vs. 5.50%).
- The average fixed income mutual fund investor underperformed the Barclays Aggregate Bond Index by a margin of 4.81%. The broader bond market returned more than five times that of the average fixed income mutual fund investor (5.97% vs. 1.16%).
Notably, even investors who have properly allocated, diversified portfolios can be upset about market volatility. After all, it underscores that the market, like life, is out of our direct control. We have to remember, however, that without this uncertainty—which can intensify at times—there would be no way to profit in the market. That is, if all the market’s risk was stripped away, there would be no potential to earn a reward.
In times like this, when heightened volatility sparks concern, we advise our clients to focus on what they can control and what they are certain of—their own individual goals and timelines. Those should be the primary factors to consider when making portfolio changes.