Advisors must ensure clients maintain a neutral stance and don’t succumb to greed or freeze with fear during the late stage of the cycle.
Brent Joyce, GLC’s chief investment strategist, believes the risks investors face today stem from emotional and behavioural decision-making.
He said the challenges they will face over the next few quarters will be typical late cycle, including: increased volatility; short, sharp run-ups in equity prices; fast-moving price corrections; and sectors making excessive gains.
Joyce said: “There are temptations for people to abandon the nuts and bolts, the bread and butter and risk too heavily into some of these areas.
“It’s not that these areas are without merits, it’s the excess that I think is the real problem; the potential pitfalls that stem from fear and greed.”
Expanding on GLC’s mid-year report, Joyce said that FOMO and chasing past performance must be kept in check by advisors, citing investors taking risky excessive exposures in infotech or emerging markets.
He added that if this is happening at the expense of crucial elements in an investor’s portfolio, the alarm bells should be ringing.
He said: “If someone is looking at a US fund or a global equity fund at the expense of something else in their portfolio, whether that is fixed income or Canadian equities, then they need to ask themselves: is the performance they are looking at being driven because of large infotech exposure in a US fund or lots of emerging markets exposure in a global equity fund?
“If you look at flows, you’ll see that investors are looking at areas of the market that have performed very well and it’s at the expense of core pieces of the portfolio, in my opinion anyway, of Canadian equities and, in particular, fixed income.”
Joyce said the other side of this coin is when investors are paralysed by fear and do nothing, abandoning a well-thought out investment plan that is tailored to them. Rather than continuing to save and invest in that portfolio, headlines and volatility convince them to stray from that path.
That, said Joyce, is equally as dangerous. “So as much as it is not the time to over-reach for aggressive growth cycle positioning, it’s also not a good idea to make rash, erratic defensive moves either. Both of those are impudent actions that put years of good solid financial planning and saving at risk.”
Joyce believes that a guiding hand from advisors is vital during this stage of the cycle and that rising rates are part and parcel of what to expect. He said that a neutral stance on equities and fixed income is prudent.
He said: “Fixed-income returns look least attractive right through this period when rates are rising but it’s precisely at this same time that I believe the attraction of bonds for a portfolio is as a risk-mitigating tool and that attraction is getting more powerful the further along we go and the more that yields move higher.
“That’s why we think a neutral stance between equities and fixed income is most apparent. Eventually, we’ll have an environment where rates are falling again so we get another three or four central bank increases over the next year or so.
"Bond yields move up a little bit further and it’s at that point that you’ll actually have income back into fixed income and its attraction will be even greater than it is today. But in the meantime it’s there as a risk-mitigating tool.”
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