First, understand that this is more than an intellectual
question. It is a highly charged emotional issue. Considering the
consequences for many people retired, or close to it, these
decisions can have life changing impact. The logical place to go
for help is to the person who made the initial recommendations;
however, if not that person, then someone with similar experience
and credentials. But, before you can speak with any financial
advisor about your portfolio, first be aware of your attitude
towards the situation – are you angry, fearful, sick to your
stomach, or indifferent? If you are desperate to gain back the
losses, you are liable to make emotional decisions that may or
may not be appropriate. If you blame the advisor (or your spouse
or other acquaintance) for the recommendations then you will be
open to almost anyone else's advice – whether appropriate or not.
If you are hesitant to make a "wrong" decision, sometimes you
don't take any action – even when action is appropriate.
Once you start to become aware of your own attitude and emotions,
consider the responsibilities of an investment advisor? What have
you shared with them about your personal financial situation and
investment preferences? Have you told them "I can't afford to
lose anything" or "I trust you" or "do what you like – just make
me a lot of money"? Their obligation is to understand you and to
make appropriate investment recommendations. They are not
expected to guarantee high returns on your money, or to have all
the answers about making money. Ultimately, it is your money and
your life; therefore, some of the responsibility will fall back
on you – the investor. If the material circumstances of your life
are negatively impacted because of investment losses (assuming no
fraud) then some of that responsibility is yours.
So, what is the client's responsibility? To provide all the
necessary information for your advisor, keep your advisor
informed of your circumstances and your feelings about your
investments, and to read the information that is sent to you -
including your statements. When you start to feel uncomfortable,
you need to recognize that emotional response and work with your
advisor to make adjustments that keep you emotionally
comfortable. Investing has been described as 80% emotional and
20% intellectual.
How can you reduce the emotional impact of market fluctuations?
At the beginning of the transaction, there is an opportunity for
advisor and client to make the sell decision before any money has
been invested – you don't need to be an investment expert.
Consider the following loss protection strategy, and then
understand how the same concept can help you decide what to do
after a drop.
Mr. and Mrs. No-Risk, Hi-Return decide to invest in a mutual fund
currently valued at $10 per unit. Their advisor expects that
based on past performance, it "should" provide 10%ish returns per
year, but this of course, isn't guaranteed. Mr. and Mrs. Return
say they are only comfortable with 10% risk. So, if they invest
$10,000. This means that of their $10,000 investment they are
only prepared to risk losing $1,000.
They then agree with their advisor on the following key values
for their investment:
$10 PER UNIT === $10,000 INITIAL INVESTMENT
10% ACCEPTABLE LOSS === $9000 INVESTMENT VALUE
$9.25 === BE ON ALERT (They call their advisor and watch
the value of their investment more closely)
$9 === They ask to SELL THE INVESTMENT
$12 OR MORE NEW VALUE === $10.8 NEW SELL PRICE ($11 ALERT)
$15 OR MORE === $13.5 NEW SELL PRICE ($14 ALERT, ETC.)
It's not physically possible for an advisor to promise 300 or
more clients that they are able to do this type of monitoring.
Everyone will have different price points and risk factors. If
it's that important to you, then learn to monitor investment
values and call your advisor if you feel concerned.
Now, what if your portfolio has already dropped below your
comfort level? First, calculate both the dollar lost if you sold
the investment today and the percentage. When you are making
decisions, focus on the value that is most easily accepted. For
example, if the dollar value drop is $10,000 and represents a
drop in your total portfolio of 8%, perhaps the 8% is easier to
accept. Second, ask whether you would buy your investment(s)
today? If yes, then discuss the expected returns and apply the
loss protection strategy above. If no, then why are you still
holding on? Finally, ask what would you invest in today and use
the same loss protection strategy as described above. Then your
only real concern is the challenge of making investment decisions
that are not based on greed and fear because your life has been
impacted due to your current investment losses. It can be very
tempting to take even greater risk hoping for greater returns to
make up for the lost money. If the losses have that much of an
impact on your life, you need to re-evaluate your investment
criteria and start learning about other ways to earn income
(besides another job and by growing a huge investment portfolio)
so you learn and carry on from here.
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