Are Your Clients’ Emotions Getting in the Way of Their Success?

It’s been an incredible 9-year bull run in the financial markets. The recent spike in volatility is indeed unsettling to investors, causing many to wonder “Is this it? Is this the big one?” During his Reddit “Ask Me Anything” session on Tuesday (2/27/18), Bill Gates added to the drama when he was asked if a crisis similar to the one in 2008 was coming in the near future, replying, “Yes. It is hard to say when but this is a certainty.” Whether we like to admit it or not, fear of losing hard earned money tends to rule the investment process and decision making because humans can behave differently when under stress.

According to DALBAR’s 22nd Annual Quantitative Analysis of Investor Behavior, “Investment results are more dependent on investor behavior than on fund performance.” This is further illustrated by their analysis of 20-year average investor returns. We’ve provided a chart below that outlines their findings.

The data shows that investors tend to make decisions at times that are less advantageous costing them significant investment performance. For example, $100,000 invested the S&P 500 in 1997 would be worth $440,874 in 20171. At the Average Investor annualized rate of 2.3%, the result is only $157,584 during the same 20-year period1. In times of market volatility, it is difficult to simply stay in the market. Many get caught up in selling and buying at the wrong times driven by emotional decision making.

Statements like “it can’t possibly go any higher” have little effect on the financial markets as proven by the last 3 years of this current bull run. Industry experts were calling for a top in early 2016. Heeding this advice could have caused investors to miss out on over 20%+ appreciation.

Additionally, as shown by the study, remaining invested in the markets instead of trying to go in and out tends to lead to better results over the long-term. However, to do this, investors must be comfortable with what is happening in their investment portfolios and focus on keeping their emotions in check.

With that said, keeping investors comfortable is no easy task. Markets are unpredictable; when risk escalates, asset returns can be quite volatile. To manage market volatility and investment risks, we find it best to have a disciplined, well-tested quantitative process that removes subjectivity and emotion resulting in consistent and repeatable investment decision making. We believe this approach significantly increases the probability of keeping investors invested for the long-term.

1Caclulated by compounding annually for the time period 1997-2016.

THIS DOCUMENT HAS BEEN PREPARED BY PARITAS CAPITAL MANAGEMENT, LLC (“PARITAS”) SOLELY FOR THE PURPOSES OF PROVIDING SUMMARY INFORMATION REGARDING PARITAS AND ITS GLOBAL WEALTH STRATEGY (“GWS”) COMPOSITE. THE INFORMATION CONTAINED HEREIN IS NOT, AND SHOULD NOT BE CONSTRUED, AS AN OFFER OR SOLICITATION OF AN OFFER TO BUY ANY FINANCIAL INSTRUMENT. AN INVESTMENT IN ACCORDANCE WITH THE GWS COMPOSITE DESCRIBED HEREIN HAS NOT BEEN APPROVED OR DISAPPROVED BY THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION (“SEC”), ANY STATE SECURITIES COMMISSION, OR OTHER ANY OTHER REGULATORY AUTHORITY, NOR HAVE ANY OF THESE AUTHORITIES PASSED UPON OR ENDORSED THE MERITS OR THE ACCURACY OR ADEQUACY OF THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL AND A CRIMINAL OFFENSE.

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THE BENCHMARK INDEX REFERRED TO HEREIN IS A BLEND OF 60% MSCI ACWI INDEX AND 40% BARCLAYS US AGGREGATE BOND INDEX. THE INDICES INCLUDED TO SHOW RELATIVE MARKET PERFORMANCE FOR THE PERIODS INDICATED ARE NOT NECESSARILY STANDARDS OF COMPARISON, SINCE INDICES ARE UNMANAGED, BROADLY BASED AND DIFFER IN NUMEROUS RESPECTS FROM THE GWS COMPOSITE. MARKET INDEX INFORMATION WAS COMPILED FROM SOURCES THAT PARITAS BELIEVES TO BE RELIABLE. HOWEVER, PARITAS DOES NOT GUARANTEE THE ACCURACY OR COMPLETENESS OF SUCH DATA.

AN INVESTMENT IN ACCORDANCE WITH THE GWS COMPOSITE MAY NOT BE SUITABLE FOR ALL INVESTORS. THIS MATERIAL HAS BEEN PREPARED FOR INFORMATIONAL PURPOSES ONLY, AND IS NOT INTENDED TO PROVIDE, AND SHOULD NOT BE RELIED ON FOR, INVESTMENT, ACCOUNTING, LEGAL OR TAX ADVICE.

INVESTING INVOLVES RISK, INCLUDING THE POTENTIAL OF LOSS OF SOME OR ALL PRINCIPAL INVESTED. INTERESTED PARTIES ARE ENCOURAGED TO REVIEW PARITAS’ FORM ADV PART 2, AS WELL AS PERTINENT PROSPECTUS/PRODUCT DESCRIPTIONS TO CONSIDER SUCH RISK PRIOR TO INVESTING. THERE IS NO GUARANTEE THAT A DIVERSIFIED PORTFOLIO WILL ENHANCE OVERALL RETURNS OR OUTPERFORM A NON-DIVERSIFIED PORTFOLIO. DIVERSIFICATION DOES NOT PROTECT AGAINST MARKET RISK. STOCK INVESTING INVOLVES RISK INCLUDING LOSS OF PRINCIPAL. PAST PERFORMANCE IS NO GUARANTEE OR PROMISE OF FUTURE SUCCESS.

THE SHARES OF EXCHANGE-TRADED FUNDS (“ETFS”) MAY TRADE AT PRICES AT, BELOW, OR ABOVE THEIR MOST RECENT NET ASSET VALUE. EQUITY SECURITIES WILL FLUCTUATE IN PRICE; THE VALUE OF INVESTMENTS IN ACCORDANCE WITH THE GWS COMPOSITE WILL THUS FLUCTUATE, AND THIS MAY RESULT IN A LOSS. SECURITIES IN CERTAIN FOREIGN COUNTRIES MAY BE LESS LIQUID, MORE VOLATILE, AND LESS SUBJECT TO GOVERNMENTAL SUPERVISION THAN IN THE UNITED STATES. THE VALUES OF THESE SECURITIES MAY BE AFFECTED BY CHANGES IN CURRENCY RATES, APPLICATION OF A COUNTRY’S SPECIFIC TAX LAWS, CHANGES IN GOVERNMENT ADMINISTRATION, AND ECONOMIC AND MONETARY POLICY. EMERGING MARKET SECURITIES CARRY SPECIAL RISKS, SUCH AS LESS DEVELOPED OR LESS EFFICIENT TRADING MARKETS, A LACK OF COMPANY INFORMATION, AND DIFFERING AUDITING AND LEGAL STANDARDS.

AN INVESTMENT IN BONDS CARRIES RISK. IF INTEREST RATES RISE, BOND PRICES USUALLY DECLINE. THE LONGER A BOND’S MATURITY, THE GREATER THE IMPACT A CHANGE IN INTEREST RATES CAN HAVE ON ITS PRICE. SELLING A BOND BEFORE IT REACHES ITS MATURITY MAY RESULT IN A LOSS UPON ITS SALE. BONDS ALSO CARRY THE RISK OF DEFAULT, WHICH IS THE RISK THAT THE ISSUER IS UNABLE TO MAKE FURTHER INCOME AND PRINCIPAL PAYMENTS. OTHER RISKS, INCLUDING INFLATION RISK, CALL RISK, AND PRE-PAYMENT RISK, ALSO APPLY. HIGH YIELD SECURITIES (ALSO REFERRED TO AS “JUNK BONDS”) INHERENTLY HAVE A HIGHER DEGREE OF MARKET RISK, DEFAULT RISK, AND CREDIT RISK.

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About the author: Douglas Hedley

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