There have been many restrictions placed on the normal rhythms of life in response to the COVID-19 pandemic. The interactions we typically take for granted such as going to restaurants, spending time with friends, working out at the gym, and traveling on vacation have all been curtailed in an effort to tame the pandemic.
A process similar to the "five stages of grief" can be seen in market crises, including the current one.
While crisis-level activity has largely subsided, advisors remain very active relative to "normal" levels of activity we saw during the bull market run.
During these volatile market swings and stay at home orders for investors, advisors remain very active. Investing activity last week was still two times average transaction volume as compared to the past 18 months. While the equity markets showed strong performance last week, advisors remained in a neutral risk stance. Cash as a percentage of portfolio dropped to 5% from 6.2%, a nearly 20% drop in cash allocations.
Advisors are very slowly reducing cash levels. Their attitude toward risk is neutral, repeating last week's trend, in that both risky and non-risky assets saw nearly zero net flows.
The next several weeks are going to be challenging for advisors and investors. The reality of the scope and severity of the pandemic along with the associated economic and market damage will hit home raising fear levels to new highs. In these times, it will be hard not to overreact, panic or lose hope. Strong emotions and behavioral biases including, anchoring, loss aversion, cascading and availability bias can cloud our thinking and lead to poor decision making. Engaging in realistic and practical planning discussions along with relevant behavioral coaching can provide essential support during these challenging times.
Advisors remain very active making small changes to client portfolios, harvesting tax losses, and fine tuning risk tolerance, while generally keeping their clients invested to meet their objectives.
Beneficial long-term decisions often feel counter-intuitive at the time, but don’t underestimate the value of a steady hand when things seem the most grim.
As a child, I remember seeing my mother’s wooden plaque of The Serenity Prayer that she kept above our kitchen sink. For those not familiar with this popular prayer, it reads...
It’s only natural for someone invested in a poorly performing active equity mutual fund to wonder if it’s time to make a change. Should an investor sell a fund if it trails its benchmark for a year? Three years? Five years?