Are you alone on the roller coaster?

Having a financial plan can help you navigate the ups and downs of the market

Recent market fluctuations have created a refreshed sense of fear among Canadian investors.   The volatility is real, but sometimes the hysteria that surrounds it can be a bit overdone, unfortunately sometimes to the detriment of the average investor. Today’s sophisticated markets have hundreds of global variables simultaneously at play which make them hard to navigate and predict for even the most skilled economists.

What should an investor do?  Unfortunately, there is no ‘one size fits all’ answer.  There is no crystal ball for economists or financial planners, but investors need to remember to keep a clear head and revisit plans rather than be swept away amidst the frenzy.   It’s hard to ignore the herd instinct and place a panic sell – especially if you don’t have any guidance or a plan.  In early August spooked investors had the biggest mass sell -off of stocks since the financial crisis of 2008.

Imagine  you are on a dark, wild roller coaster with controls to choose a red, blue, green or yellow track and an emergency break.  It’s hard to see, and you aren’t sure where each track ends up.  As the ride gets scarier, you become increasingly unsure of which track to take.  You hear people yelling to get out while you still can.  In fear, you pull the emergency break.  It felt right at the time but now you’re unsure.  You wanted to get to your destination except now you’re off the track.

Or, you can ride the roller coaster with your financial planner by your side.  When the turns get scary, you have an educated sounding board.  You will be reminded of the destination you chose and encouraged  not to pull the brake in panic, but rather keep the course.  You may be advised against the red track altogether, or to consider the yellow track.   Sometimes when you’re scared, it’s simply a reminder of the end goal, and a calm voice that gets you through the bumps.

Canadians with financial plans report much higher levels of confidence in dealing with life’s uncertainties and reaching their financial goals.  Unfortunately fewer than 2 out of 10 Canadians work with a professional to create a financial plan.  October 17 – 23 is Financial Planning Week in Canada, which is spearheaded by The Financial Planning Standards Council, a non profit organization to improve financial planning for Canadians.  Among the most important jobs financial planners do is to be the voice of reason for an investor in a panic.

Richard Peterson, co-author of ‘MarketPsych: How to Manage Fear and Build Your Investor Identity’ says most investors know, intellectually, that selling in a panic is the wrong strategy.  But instinctively, it’s hard to resist.  Furthermore, seasoned investors and portfolio managers look to benefit from the knee-jerk reaction of average investors to flee.  During the US debt crisis Frank Murtha co-author of ‘MarketPsych’ indicated that the sell off by investors would almost certainly be overplayed.  “I’m quite certain there will be an overreaction that can be exploited for long term investors.”

How to stay on track?  Have a financial plan, a balanced portfolio mix that is matched to your risk tolerance and investor profile, and seek professional advice from a financial planner who you can trust. 

Jurrien Timmer, Director of Global Macro for Fidelity states, “The important thing to remember is that you should maintain perspective and have a sound asset allocation plan.  Panic is not a strategy.  If you have a good plan, one that makes sense for your situation over the long term, then it is important to not get sucked in by the chaos and emotion.”

During Financial Planning Week this year, revisit your financial plan so you and your advisor can navigate your way together through these bumpy tracks. Keep your eye on the destination and you may even enjoy the ride.

Link to column as it appeared in Elgin This Month October 2011 edition (page 18)

Stephanie Farrow, B.A., CFP.,  Stephanie has over 20 years experience in the financial services industry, a diploma in Financial Planning from the Canadian Institute of Financial Planning, and Certified Financial Planner designation.  Stephanie has been writing a financial planning column for the local business magazine Elgin This Month since 2010 and hosts our Farrow Financial Blog and Twitter @farrowfinancial.  Stephanie and her husband Ken Farrow own Farrow Financial Services Inc., are busy raising three young children and actively involved in the community. Our Farrow Financial Services Team.