Investors have individual financial blind spots and investing tendencies that can get them into trouble. Kim Parlee speaks with Brad Simpson, Chief Wealth Strategist, TD Wealth, about the importance of keeping perspective and the travails of market timing.
Talks about the space between your ears, so we're talking about the psychology of the markets.
And I think if I could, it's the idea that your returns are a factor of what you think and what you do and what the markets do. So we're going to divide it up in two parts today. So you talk about the space between your ears, and I guess two things you bring up. The first is that you're out on tour, so to speak, talking to people. And people are nervous, that's what they're feeling right now.
Yeah. In 25 years in the investment business, I've never really seen this quite a fear before. And I always think, the height of fear for financial fear was 2008. And boy, that resonated everywhere.
This is a different type of fear. 2008 is talking about fear about one's financial well-being. Today's the fear of a lot of the questions that I'm fielding and a lot of the things that we're fielding through an institution as a whole is about fear for one's well-being, fear for our way of life, fear for democracy and capital markets and all those things, which is really quite ominous if you think about it.
It is. And I will say later in a note you actually highlight the fact that once a lot of progressive practices are in place, they keep going. And we can't get into everything, but you also talk about how the American Psychological Association validates what you're hearing from the polls they've done in the US.
Yeah. So when you kind of pose these questions, you kind of go do a little more reading and see what's going on. And yeah, lo and behold, there's American Psychologist Association did a big survey of their client base in August, 2016. And they saw this in their survey, this kind of rising fear of political and the economic environment, that was an outlier. It was unusual at how much they were seeing.
So they did a follow-up in January, and then it was really pronounced. And so really what their findings are are that in a disproportionate way, that the answer is directly from the American individuals on this idea of fear for a way of life and democracy and capital markets is at an all-time high. And I think that those are our American cousins, and I think we have certainly a similar feeling in Canada.
So if you marry that back to what this means for somebody's investments, fear means sometimes getting out of the market, not doing anything.
And is that what you've been hearing?
Yeah. I think the perfect example is I sat down with one of our advisers and they told me this story. Now, I confess this is one, but I've heard this numerous times. I use an example of one, but I've heard this on multiple occasions.
I mean, I think we could agree that going into the American election, there was a lot of fear going into it if Donald Trump won. And the predictions were all dire if he did win. And these predictions were said with such confidence.
And well, he did win. And then that, well, I would-- this call that would say, well, that market's going to crash or it's going to be very dire if he wins. Well, since then markets have been on an absolute tear. You can't turn on the news, financial news, and not hear that there's a market at a new all-time high today.
And a lot of that is based on a new thesis that has been incredibly positive for markets. And so what that really shows us, both on the expert level, which you and I have talked about before, and at-- this is day-to-day folks, are that many of us suffer from an overconfidence bias. We hold a view and we hold it with such certainty. But the problem is when we're setting odds on that, we have this inner statistician--
--that is wrong. But we feel it with such conviction. And there are times that our conviction pays off. But boy, more often than not, it doesn't. We do get that wrong.
Let's talk a bit about that, because one thing you highlight in here too is that there's all these things that behavioral economists will look to in terms to explain why the inner statistician does what it does, overconfidence, loss, regret aversion, those types of things. So how does that play into what people do?
Well, back to the perfect examples. One of the stories that I heard was before going to the election, well, I'm just going to sell everything and go into the market. That's an over-confidence call. And then you say, well, boy, markets are on a tear. All of a sudden I have regret and I start counting losses that I actually don't have.
Then you say to yourselves, well, then I'm going to go back into the market again. But what if I'm wrong to go in here, because markets are at all-time highs? Well, that's loss aversion.
And we get ourselves stuck in these loop in these behaviors. And if we could acknowledge them and understand them and say, let's take the academia away from it and just go, we have blind spots when it comes to this and if we could acknowledge these blind spots and understand what these blind spots are-- because each one of them have them, we just have different ones. But if we can uncover them, boy, that can have a dramatic impact on your investment success and how you build a portfolio and how you build a portfolio then over the long term.
So once you, I guess, understand these blind spots, as you talked about it, what do you do about them?
Starting point is knowing. And then the second step is once you know, to talk about it. Think about it. Put it front and center.
So one of the-- sometimes yourself, you can work that out and you sit down with a piece of paper and write them out and know that--
Understand your biases.
Yeah. Another one is that sometimes it's helpful to have a source or somebody else who can work with you on that and potentially to work with your adviser, to sit down with you and help uncover these so-called blind spots, if you will, and then make sure you incorporate that into your wealth plan.
So I mentioned at the beginning, there's the how you think about things and then what the market is doing. So here you're framing the psychology of how it is that people work. And then, I guess the next point is, how do you fit that into what the markets are doing? So make that connection for me.
Sure. Sure. Well, I said, the starting point is there's how you're going to think about things. And then we've all heard you need to have a long-term time horizon. And that's important.
But the problem is the space between here of how you're thinking about things and the long term, a lot of things can go wrong. So I think the piece in the middle is that I think you need to have a view over an 18-month period. And that's what we do as an organization.
We have this wealth asset allocation committee that I am a member of. And in this committee, we look at-- every month we meet, and we look at, in a very clear and defined way, what our thoughts are and what we're thinking towards this next 18 months. And then if we make changes in the way we think about things, then we make adjustments to how we're invested.
So in November, we thought sentiment had really changed. So we thought, well, if you're going to have an environment where there's the belief there's going to be more growth, potential for more inflation, you probably want to have a reduced allocation into fixed income. So we reduced our weights into fixed income, both in domestic bonds, in global bonds.
And then we said, this is going to have a positive impact on equity markets, so we went overweight onto equity markets. And then we said, when we looked at all the equity markets that were out there, where's this most positive to? Well, the United States was the place, so we went overweight. And so by having those thoughts then, we've gone through three or four months where returns have been really good, things really have worked out.
Starting in March, we sat down and said, well, has our 18-month thinking started to evolve here a little bit? And when you start seeing some of the moves that we've seen, it's probably a pretty decent time to revisit it. So that's what we did.
So it's almost the reverse of where we were before. So all of a sudden, what we've done is we've shifted some money back from equities over back into fixed income, kept our overweight on the equity side with the United States, reduced a little bit of our exposure into Canada, moved a little bit of that exposure internationally, and you take a little bit of money off the table here, move some money back into fixed income, because rates have backed up a little bit based on the things that we've already discussed, and then on the equity side, make some adjustments to reflect some of the moves that we've seen in the last quarter.
Fascinating discussion. I'm sure we'll be hearing a lot more, Brad. Thanks very much.
Oh, thank you.