Most investors find investing in the stock market to be a daunting task. However, trusting your investment manager to invest your assets prudently is critical, and it’s not always about timing the market, but rather about time in the market. Unfortunately, many investors make long-term financial planning mistakes by selling out of underperforming investments and buying into the flavour of the month based on short-term return differentials. This behaviour increases the likelihood of permanent capital destruction.
Data on historical returns show that the performance of active investment managers diverges over time and that investment strategies perform differently in different market conditions. When uncertainty is high, clients tend to become short-term focused, resulting in suboptimal decision-making.
The last three years have been a rollercoaster ride, not only in the financial markets but also in everyday life. A pandemic that nearly shut down the world, an ongoing war in Europe, a cost-of-living crisis caused by multi-decade high inflation, and two bear markets have left investors cautious and feeling compelled to act. Often, they mistakenly change investment managers.
As investment managers and financial advisors, we are responsible for providing prudent financial advice and educating clients on behavioural biases that can lead to poor decision-making. Investors frequently struggle with loss aversion, a bias that causes them to be more uncomfortable with losses than they do with equivalent gains. Investors fear the regret of not changing investment managers who are underperforming in the short term without looking at the facts and remaining emotionally neutral during decision-making, which exacerbates the problem.
Managing biases and limiting short-term decision-making, according to historical evidence, reduces the risk of permanent capital destruction by staying invested and maintaining a long-term focus. When investors manage their biases and limit their short-term decision-making, the likelihood of long-term investment success increases.
“Stocks are a safe bet, but only if you stay invested long enough to ride out the corrections,” famous investor Peter Lynch once said. This is true for both the stock market and investment managers. We maintain trust by investing time with clients, assisting them in sticking to their financial plans, and celebrating with them when they achieve their long-term financial goals.
Finally, investors must have faith in their investment managers to invest their assets prudently and for the long term. Investors should not focus on short-term market fluctuations or performance differentials but rather have faith in the investment strategies they have chosen. Limiting your thinking to the present moment and controlling biases is critical for long-term investment success, and trusting your investment manager is critical for achieving your long-term financial goals.
