Covid-19 Crisis: Four Lessons For Financial Advisors

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Covid-19 Crisis: Four Lessons For Financial Advisors

As the COVID-19 crisis melts down Financial Markets across the world, it’s as good a time as ever for Advisors to reflect on the key lessons that they can glean from this experience.

Bill Gates once famously said that “success is a lousy teacher, as It seduces smart people into thinking they can’t lose”.

Such is invariably the case with those working as Financial Advisors.

As the COVID-19 crisis melts down Financial Markets across the world, it’s as good a time as ever for Advisors to reflect on the key lessons that they can glean from this experience.

Investors tend to have short-term memories; and to make matters worse, their optimism waxes and wanes in direct proportion to market movements.

This means that their bullishness on any given asset class would be reaching heady heights just as they approach peak valuations.

That is just one of the reasons why it’s critical to clearly explain the risks associated with every investment, however ‘theoretical’ those risks might seem.

Take for instance how debt funds have fared over the past couple of years.

Credit defaults and yield spikes have marred their returns, pushing many of them into negative territory even! And yet, they would have been touted as risk-free alternatives to FD by most Advisors

Before facilitating an investment, it would be very prudent to have a signed statement of risk in place, which clearly delineates that your client has understood parameters like volatility, worst quarter/month/year returns associated with a given investment.

Covid-19 Crisis: Four Lessons For Financial Advisors

 

The time-tested process of building out a portfolio in a top down manner, after completing a thorough assessment of an investor’s risk tolerance, never goes out of style.

Of late, with the widespread proliferation of Systematic Investment Plans, it’s not uncommon for investors to be 100% invested into equities at all times, regardless of their risk profiles or market valuations.

Even recently, we saw front line stocks rallying or not breaking down despite subpar earnings growth, resulting in stretched valuations for many blue-chip stocks.

As Advisors, it’s important that we use our common sense and always keep the above in mind while designing portfolios.

This month’s blitzkrieg on the equity markets would have served to reinforce the fact that it is quite impossible to call a market top or bottom.

Covid-19 Crisis: Four Lessons For Financial Advisors

When panic or euphoria take over, all sophisticated charting tools and projection models fail miserably.

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