As of July 31, the current ASX bull market had been running for 784 days. Volatility had almost subsided and that twitch most people developed during the GFC had finally disappeared. Consistent good market returns had made some people excited. Other people started becoming extremely nervous.
Normally advisers will spend time stressing the importance of discipline to clients during market downturns, but that’s only part of the job. It’s equally as important to keep clients on track with education when markets are raging upwards. If not, why else do they have a risk profile and their assets allocated in accordance with that risk profile?
Investors who are guided by the performance of the markets, instead of their risk profiles, will inevitably find themselves underestimating risk, or overestimating it.
Recently the investment section of the Globe & Mail in Canada surveyed its readership about their concerns regarding a market correction. Only 14 per cent said they were very anxious, while over a third were confident there wouldn’t be problems ahead.
I can only assume, but maybe that one third had a dose of recency bias from the consistently good returns and low volatility – their good returns had made them feel good about more good returns in the future. The 14 per cent, I assume, had tuned into the correction channel.
In the media world, journalists have latched on to an impending correction theme. The longer things went without a pullback, the more financial journalists added themselves to the, “I need to write a story about the impending correction” list. Most of the commentary and analysis amounted to – “this has been a good run, but it will have to end soon.”
Though if we looked at bull markets on the ASX since 1980, it was only in July that the current bull market moved into fourth place for longevity. To catch third it has to roll on for another year and 42 days, while the longest running is still over 1000 days away in the distance.
The potential for the bull market to roll on another 1000 days or end tomorrow has to be put in perspective for clients. The bullish are wondering why they aren’t getting more equity exposure while the bearish are wondering why they aren’t already sitting in cash. A move either way is only a guess.
This is why investment discipline remains important no matter what the market looks like. Don’t stray too far from clients’ asset allocations and keep reminding them of the importance of rebalancing. Then they’ll understand they aren’t over or under-exposed.
Investment discipline isn’t a one way street. It’s required when the markets are rough, but it’s equally required when the markets are good.
Peter is the managing director of FYG Planners. He is a Certified Financial Planner (CFP) who started in the financial services industry in 1981. A specialist in business development, Peter’s role primarily focuses on providing strategic planning advice to FYG Planners on its future direction, improving the technical skill base of the group, identifying business growth opportunities and services that can be developed for use by FYG Planners Advisers.
