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Taking emotions out of investing

Having a financial advisor can ensure that you aren’t missing any blind spots.

“Few aspects of human existence are more emotion-laden than our relationship to money” – Warren Buffet 

Behavioural investing is such an interesting concept. Study after study proves that the very nature of our human existence is the part that makes investing so difficult – emotion. We sure are living in interesting times; experiencing a pandemic virus is something many of us will most probably only experience once in our lifetime. Over the past few weeks I have seen a few different reactions to this:

  • Investors investing more – making use of the cheaper unit prices as the market cycle moved downwards.
  • Investors withdrawing – due to financial needs, but also due to fear of the uncertainty.
  • Investors not doing anything – waiting to see what will happen, locally and globally.

Times like these remind us to go back to the basics. It is not about timing the market, but time in the market. Sticking to our original goals, our long-term strategy and our investment philosophy. The graph below illustrates the impact on an investment if you missed some of the best days in the market in the past 25 years…

If you view an investment portfolio over 25 years, missing 25 days does not seem like much, even a 100 does not seem like much, but the impact is life-changing. We will never be able to accurately time the market cycles, markets will always move in cycles. The reasons and main life events may differ – from the Great Depression to the housing crisis of ’08, the bubble and perhaps now the COVID-19 world pandemic – but the fundamentals remain. The market will recover again and being in the right place at the right time will be imperative.

In uncertain times it remains difficult to know what the right choices are in your portfolio. Different investment strategies, local/offshore, cash/bonds or equities – these all become overwhelming and the noise in the media does not help. This is the time when it is important to trust your advisor. The emotion is taken out of the situation and the best decisions for you and your family can be made this way.

Alpha, Beta and now Gamma – recently researched by the Morningstar team:

  • David Blanchett, CFA, CFP®  head of retirement research at Morningstar Investment Management
  • Paul Kaplan, Ph.D., CFA, director of research at Morningstar Canada.

Gamma refers to the importance of having an advisor on your portfolio, the more complex your portfolio becomes, the more important focussed advice becomes, from asset allocation to tax efficiency. Not only does this advice take the emotion out of your decisions – ensuring objective advice, it also ensures you aren’t missing any blind spots. The Gamma equivalent effect is 1.59% – therefore a return of roughly 1.6% higher on your portfolio.

The study focusses on retirees and the importance of managing your income after retirement. I believe the principles can apply for any investment portfolio.

Gamma Factors

The five different Gamma factors are:

  1. Asset location and withdrawal sourcing;
  2. Total wealth asset allocation;
  3. Annuity allocation;
  4. Dynamic withdrawal strategy; and
  5. Liability-relative optimisation.

The principles address the very aspects why you need a professional, independent advisor advising on your investment portfolio:

  • Ensuring you have suitable products and planning in place for your specific situation – taking into account your individual needs, family and dependants, risk profile and expectations at retirement.
  • Planning for retirement – and ensuring it is managed optimally when you reach retirement. Focussed advice on asset allocation, risk profile, withdrawal rates and economic risks need to be planned for.
  • Planning for emergencies – we need to be prepared for things we never saw coming, like Covid-19.

This is an optimal time to review the current portfolio you have in place, and ensuring you are making the right decisions in times of crisis. This will put you on the right track going forward.

“Not being controlled by emotion helps to see things at a higher level.” – Ray Dalio

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