Steering clients away from recency bias

Equity investment specialist addresses how market changes can leave investors feeling uneasy

Steering clients away from recency bias

Advisors can ease clients’ jitters over volatility by steering them away from recency bias, according to an equity investment specialist.

David Polak, of Capital Group, said it’s important to put this year’s market in context and that after 2017’s calm seas, any sort of choppy water this year was bound to draw attention.

In a recent white paper, the company explored the theme of volatility being a long-term investor’s “unlikely ally”, emphasising that corrections are part of the landscape, the global economy is largely supportive of corporate earnings and that volatility can represent opportunity for those with a long-term horizon.

However, he conceded that changes in the market, especially after such a straight run, can leave investors feeling disorientated.

Polak said that recency bias over events such as February’s correction should not deter advisors and clients from the agreed roadmap and that they should consider how this plan is being affected by “current turmoil”.

He said: “Phrase it as ‘we’ rather than saying, hey Stan it sounds like you’re panicking! To what extent are we being impacted by recent bias? Let’s take a step back and look at the longer term and let’s look at the plan we had in place.”

Polak said the question of rebalancing your equity mix and bond structure in the face of jittery clients risks losing sight of the objective.

He said: “If you’re trying to influence or control your investments in the near term, you are probably going to make mistakes.

“Really good advisors will have a plan for their client, which will depend on the client’s resources, what stage they are in terms of investments, whether they are close to retirement or whether they are just starting.

“That plan should have flexibility built into it so the advisor and the client can take advantage of the situation but broadly speaking when the storm hits, you should have a plan in place and follow it. That’s true in life and true in investing. If you’re trying to make things up on the fly, your chances of making mistakes go up.”

Decisions on portfolio mix, said Polak, depend on each client but he believes that now is a good time to seek diversification in places like emerging markets, EU and Japan.

In terms of bonds, Capital Group’s stance is that they provide crucial balance and that in market declines of at least 15% during the past three decades, bonds have provided relatively significant returns.

But Polak said that now is a good time to reassess your exact fixed-income mix.

He said: “We’ve had an extraordinary period since the financial crisis where through quantitative easing and interest policy around the world, it’s become harder and harder to find the income that many investors require.

“So over time we’ve seen bond portfolios slowly but surely change a little shape. They’ve moved out from investment grade securities and they’ve moved in to lower grade bonds to get that yield and capture that excess yield.”

He added: “So to get a true anchor to windward in volatile times, investors and their advisors probably need to look at the proportion between investment grade and high yield, and the proportion between investment grade and emerging market debt.

“Where the balance over the years has moved toward the more racier categories in order to get yield, it feels like a rebalancing would be a good thing to do because you are going to get some pretty high correlations to equities in areas like high yield and emerging market debt.”

 

LATEST NEWS