First, understand that this is more than an intellectual
question. It is a highly charged emotional issue. Considering
the consequences for many people retired, or close to it,
these decisions can have life changing impact. The logical
place to go for help is to the person who made the initial
recommendations; however, if not that person, then someone
with similar experience and credentials. But, before you can
speak with any financial advisor about your portfolio, first
be aware of your attitude towards the situation – are
you angry, fearful, sick to your stomach, or indifferent?
If you are desperate to gain back the losses, you are liable
to make emotional decisions that may or may not be appropriate.
If you blame the advisor (or your spouse or other acquaintance)
for the recommendations then you will be open to almost anyone else's advice – whether appropriate
or not. If you are hesitant to make a "wrong" decision,
sometimes you don't take any action – even when action
is appropriate.
Once you start to become aware of your own attitude and emotions,
consider the responsibilities of an investment advisor? What
have you shared with them about your personal financial situation
and investment preferences? Have you told them "I can't
afford to lose anything" or "I trust you" or
"do what you like – just make me a lot of money"? Their obligation is to understand
you and to make appropriate investment recommendations. They
are not expected to guarantee high returns on your money,
or to have all the answers about making money. Ultimately,
it is your money and your life; therefore, some of the responsibility
will fall back on you – the investor. If the material
circumstances of your life are negatively impacted because
of investment losses (assuming no fraud) then some of that
responsibility is yours.
So, what is the client's responsibility? To provide all the
necessary information for your advisor, keep your advisor
informed of your circumstances and your feelings about your
investments, and to read the information that is sent to you
- including your statements. When you start to feel uncomfortable,
you need to recognize that emotional response and work with
your advisor to make adjustments that keep you emotionally
comfortable. Investing has been described as 80% emotional
and 20% intellectual.
How can you reduce the emotional impact of market fluctuations?
At the beginning of the transaction, there is an opportunity
for advisor and client to make the sell decision before any
money has been invested – you don't need to be an investment
expert. Consider the following loss protection strategy, and
then understand how the same concept can help you decide what
to do after a drop.
Mr. and Mrs. No-Risk, Hi-Return decide to invest in a mutual
fund currently valued at $10 per unit. Their advisor expects
that based on past performance, it "should" provide
10%ish returns per year, but this of course, isn't guaranteed.
Mr. and Mrs. Return say they are only comfortable with 10%
risk. So, if they invest $10,000. This means that of their $10,000 investment they
are only prepared to risk losing $1,000.
They then agree with their advisor on the following key values
for their investment:
$10 PER UNIT === $10,000 INITIAL INVESTMENT
10% ACCEPTABLE LOSS === $9000 INVESTMENT VALUE
$9.25 === BE ON ALERT (They call their advisor and watch
the value of their investment more closely)
$9 === They ask to SELL THE INVESTMENT
$12 OR MORE NEW VALUE === $10.8 NEW SELL PRICE ($11 ALERT)
$15 OR MORE === $13.5 NEW SELL PRICE ($14 ALERT, ETC.)
It's not physically possible for an advisor to promise 300
or more clients that they are able to do this type of monitoring.
Everyone will have different price points and risk factors.
If it's that important to you, then learn to monitor investment
values and call your advisor if you feel concerned.
Now, what if your portfolio has already dropped below your
comfort level? First, calculate both the dollar lost if you
sold the investment today and the percentage. When you are
making decisions, focus on the value that is most easily accepted.
For example, if the dollar value drop is $10,000 and represents
a drop in your total portfolio of 8%, perhaps the 8% is easier
to accept. Second, ask whether you would buy your investment(s)
today? If yes, then discuss the expected returns and apply
the loss protection strategy above. If no, then why are you
still holding on? Finally, ask what would you invest in today and
use the same loss protection strategy as described above.
Then your only real concern is the challenge of making investment
decisions that are not based on greed and fear because your
life has been impacted due to your current investment losses.
It can be very tempting to take even greater risk hoping for
greater returns to make up for the lost money. If the losses
have that much of an impact on your life, you need to re-evaluate
your investment criteria and start learning about other ways
to earn income (besides another job and by growing a huge
investment portfolio) so you learn and carry on from here.
Tracy Piercy is a Certified Financial Planner who
goes beyond the parameters of traditional financial planning
to integrate proven success principles with practical financial
planning strategies. She has worked in the financial industry,
in insurance, banking, and as a top producing investment advisor
with CIBC Wood Gundy, for more than 15 years. Tracy teaches
courses in money management and is the author of Enlightened
Wealth, a personal money journal http://www.moneyminding.com
. You can reach Tracy at [email protected]
