Why use a bearish investment advisor during a bear market?
Why bother to pay for investment advice from an advisor who says the market is going down? Why not simply put all of your money in the bank and avoid the advisor’s fees?
The problem with bear markets is that when they go down as they get close to the bottom they become very scary and investors become demoralized and mentally tune out investment advice. So the risk of not working with an advisor is that an investor could miss out on getting advice to buy stocks at the bottom of the cycle. What happens at the bottom is known as the “capitulation phase” where investors psychologically give up on investing and capitulate. It is that moment when an investor should do the opposite. Unfortunately investors tend to follow the herd behavior of the masses and thus are afraid to buy or hold stocks at the bottom of the market.
So investors who accept the views of a bearish advisor should work with the advisor even if the best strategy is one of holding very low yielding bonds. This is because investors need to have a coach that can prepare them for both going into and then also coming out of the crash.
Perhaps investors feel they can simply read a free blog post or a financial newspaper subscription to decide when to get back in the market. The problem with that is that the overwhelming amount of negative emotions experienced during a crash require personalized coaching and encouragement from a seasoned adviser who can provide the emotional fortification to encourage clients to be fully invested in equities at the bottom of the market.
Emotional exhaustion leads to failure
When someone is emotionally drained that increases the chance of a failure. For example airline pilots on long flights are required to rest after a certain amount of working time. Mountain climbers on Everest report they are much more energetic when they have the comforts of home such as a hot shower and good food in camps on the mountain.
So these situations are similar to the idea that an investor who is emotionally battered by a crash may be tempted to follow the herd and panic sell at the bottom and panic buy at the top of the market. Investors need to find emotional comfort so that they can think more clearly during times of market stress.
Dalbar did a study saying that in the booming 1990’s that individual investors made 3% annualized and the market returned 17% annualized. So the individual investors bought when the market was high and sold when the market was low.
Investing makes people feel emotionally beaten up
Market timing and bubble detection
It is not possible to time the market. However it is a reasonable goal to attempt to estimate that the market is extremely overpriced or extremely underpriced and then get prepared. Unfortunately bubbles can last for several years and can get even bigger. However, one must try to move out of overpriced assets during a bubble even if the bubble is still going up and one must do this even if it is not possible to time the market.
I have written about these topics in “U.S. equities are 70% overpriced”.
Investors should seek independent financial advice.
Photo by Gregory Szarkiewicz