Financial advisors: how best to keep hold of emotions

A recent report from the Bank of Montreal suggests most Canadians can’t keep their emotions in check when it comes to investing. Canaccord Genuity Wealth Management advisor Kim Inglis has some suggestions how to combat these demons.

Financial advisors: how best to keep hold of emotions
Even the most stoic investors sometimes let their emotions get the best of them. That’s okay if you’re investing for your own account, but if you’re a financial advisor guiding your clients through the minefields that are the markets, you can’t afford to lose your cool.

In a November 10 article in the Toronto Sun, Canaccord Genuity advisor and portfolio manager Kim Inglis discusses what investors need to be mindful of in order to be successful in the markets. Her two biggest suggestions: have a set of rules dictating how you make your investments and then stick to those rules. It’s not rocket science yet breaking these two rules are the most common reason investors mess up.

Using the investment policy statement (IPS) as a guiding light, both the advisor and the client are better able to stick to their plan when markets get a little nasty. Experience certainly also comes into play when it comes to keeping hold of your emotions. When you’ve seen several market corrections over your career it’s much easier to remain rational and calm. If you’re new to the business (post-2009) it’s best to find a mentor who’s been through it. He or she will be able to talk you off the ledge.

Not keeping one’s emotions in check turns out to be a very expensive proposition.

A classic example of investor emotions affecting performance is the Fidelity Magellan Fund, managed by Peter Lynch from 1977 through 1990, and available to the public since 1981. In the nine years the fund was available to all investors and not just Fidelity insiders, Lynch achieved an annual return of 21.8%, almost six percentage points better than the S&P 500.

But that was the fund itself. Individual investors averaged just 13.4% over the same period of time, a result of getting in and out whenever things got a little volatile. By simply utilizing a buy-and-hold philosophy investors would have generated almost $28,000 in additional capital from the same $10,000 investment.

In Inglis’ experience, fear clearly doesn’t pay.