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Investor fatigue syndrome

Monday October 01, 2012

I have been hearing the term “investor fatigue syndrome” (IFS) more and more frequently, and it’s starting to scare me. IFS occurs when investors either lose money or don’t make much over a lengthy period of time. Usually there are crisis-type events that contribute to IFS – for example, 9/11, the tech wreck, the credit crisis, the current global economic slowdown, and so on. But IFS scares me because of some investors’ reactions to crisis. Most wind up hurting themselves and their families in the end. Here’s a summary of these reactions and a look at why they might be dangerous to your financial health.

Cashing out

This reaction usually takes you out of the market at (or near) lows and guarantees losses. When you sit down with your advisor and plan to retire in 20 to 25 years and invest accordingly, your plans doesn’t drastically change if markets go up fast or if they drop fast.

Think of it like your home. If you buy a home for $500,000 and it rises to $650,000 two years later, most of us don’t immediately sell the home to realize the profit. Conversely, if your home loses money, you don’t usually sell either. Why? Because you still have to live somewhere, and you don’t get ahead moving frequently owing to the many costs of moving.

Similarly, regardless of losses or gains, you still need to retire down the road and you’ll require real assets to fund your retirement. Losses early on can be recovered from, because time is on your side. What you want to avoid are losses within 7 to 10 years of retirement, so it’s important to ensure that fixed income plays a larger role in that pre-retirement stage.

Irrational decisions

These again usually occur at or near the bottom and typically involve selling equities low and buying safer fixed income. But this can in fact increase risk as you try to make back the money you’ve lost. If you ramp up the risk, it’s better done in your 30s or 40s when time is your friend. Exempt market products and hedge funds may have a place in your portfolio, but make sure the percentage in your portfolio isn’t too high. If you don’t understand these alternative products, don’t invest in them. Some pay higher commissions and also have higher risks associated with them.

It is okay to move your equity percentage down at various points, but don’t do it after a big correction. That will only lock in (crystallize) the losses. With the record low interest rates we are currently experiencing, it could take a decade to earn back your losses using fixed income assets.

Tuning out your financial advisor

If there ever was a time you need to listen to your financial advisor, it’s now. Warren Buffett didn’t get to be a billionaire by retreating when things got rough. He does his homework, finds companies he likes, and stays with them for the long term. If a correction occurs, he buys more, based on the principle that if he liked the company at $40 a share, he should like it even more at $25 a share, because it’s on sale.

For many of us, buying low is a very difficult plan to put into practice. We understand it from a conceptual and intellectual level, but something in our stomach usually holds us back.

If you told your financial advisor you are conservative and found yourself in aggressive equity mutual funds or with stocks down 35%, I’d find a new financial advisor rather than tune the first one out. Communicate where your comfort level is. Your advisor will tell you if you can get to where you want to go within that comfort level or if you need to take it up a notch to give you a better opportunity to realize your goals.

Sitting on the fence or sticking your head in the sand

This occurs when you don’t even look at your statements or don’t return your financial advisor’s calls to meet and pretend it just isn’t happening. You need to stay in touch with your financial advisor at least once a year.

All of us go through changes as we age. Besides getting older and moving into a pre-retirement phase, we may get sick or die, our spouse may get sick or die, we might lose our jobs, get a pay raise, have another child, or receive an inheritance to name a few. All these life events need to be discussed in terms of how they may affect your retirement plans. You may be able to retire earlier than planned or perhaps need to retire later. Tell your advisor about key life events and ask how these will affect you in terms of achieving your financial goals. Your life circumstances can change dramatically over 30 or 40 years. Your plan will have to change as well.

My advice is that if you are feeling some investor fatigue syndrome, stay with your plan. Investing can be a long and tedious process. It’s not always fun. Starting an investment plan from scratch and finding your plan at $300,000 doesn’t happen overnight. It takes years and years of investing every month and adding lump sums when possible. The home analogy fits here as well. You buy your home and have big mortgage. Twenty years and hundreds of payments later you find yourself owing the house, now very likely worth way more than what you paid for it, including mortgage interest.

There are many forces working to derail your plans. If you want to have a comfortable retirement and be in control of your own destiny, try to put about 10% of your salary into retirement plans (which also help cut your taxes), Tax-Free Savings Accounts (TFSAs), non-registered investments, and if you have young children, Registered Education Savings Plans (RESPs).



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Personal Opinions & Recommendations Disclaimer

The foregoing is for general information purposes only and is the opinion of the writer. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice. However, please call the author to discuss your particular circumstances.