|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.
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.
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
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).
Generic Mutual Fund Disclaimer
Commissions, trailing commissions, management fees and expenses
all may be associated with mutual fund investments. Please read
the simplified prospectus before investing. Mutual funds are
not guaranteed and are not covered by the Canada Deposit Insurance
Corporation or by any other government deposit insurer. There
can be no assurances that the fund will be able to maintain
its net asset value per security at a constant amount or that
the full amount of your investment in the fund will be returned
to you. Fund values change frequently and past performance may
not be repeated.
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.