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The stock market is a roller coaster ride: listen to your financial advisor!


Richard Morin

Update :
Update :
March 13, 2020

In the space of a month, we have gone from record highs in the stock markets - on the back of full employment in Canada and the United States, modest but steady economic growth and rising profits - to a rapid decline of more than 20%, triggered by the Covid-19 pandemic and exacerbated by the flagrant lack of leadership of the most powerful man on the planet.

There were a few signals before the fall - such as the drop in long-term interest rates - but almost no one predicted this drop, let alone its magnitude. One only has to read the analysts' predictions at the beginning of the year to be convinced.

Your financial advisor is no exception; he or she doesn't have a crystal ball to predict downturns either. So, if he can't save you from stock market declines, how can he help you navigate through the storm?

The essential role of your financial advisor

First, studies[1],[2] show that investors who work with a financial advisor perform significantly better than those who make their own investment decisions. Vanguard estimates that behavioral coaching increases an investor's long-term return by about 1.5% per year. More importantly, it increases the investor's chances of achieving their financial goals, including retirement.

In times like these, the role of your advisor is crucial.

The importance of sticking to the game plan

A good financial advisor will not allow a client to panic and sell off some or all of their portfolio to take refuge in investment certificates. They will proactively communicate with their clients to remind them that the asset allocation (the percentage of bonds and stocks in the portfolio) - which the client has agreed upon - is designed to ride out market downturns, while staying focused on their long-term goals.

Investors who stick to the game plan developed with their advisor will eventually recover the value of their portfolio and there will be no major impact on achieving their financial goals. In fact, for those saving for retirement, this decline is an opportunity to buy stocks "at a discount".

Those who are already retired should keep in mind that the decline in stock market prices does not affect the income (interest and dividends) generated by their portfolio, as long as the companies continue to pay dividends. For those whose withdrawals exceed the income generated by the portfolio, it may be wise to consider deferring some discretionary spending. A good financial plan is an essential tool in making this decision and a conversation with your advisor would be in order.

Investors who do not have the discipline to stick to their game plan - and who liquidate their portfolios to take refuge in investment certificates during downturns - have underperformed the market by an average of 4% over the past 30 years[3].

Listen to your financial advisor!

[1] Claude Montmarquette and Nathalie Viennot-Briot, The Gamma Factor and the Value of Financial Advice, Cirano, August 2016

[2] Assessing the Value of Advice, Vanguard Research, September 2019

[3] Quantitative Analysis of Investor Behavior, Dalbar, 2019