Canadian investors have high expectations, but may be prone to panic moves: study

Strong markets have given Canadians high hopes for their portfolios, but a new study suggests investors might be prone to making knee-jerk decisions in the face of a market disruption, such as a sharp drop in the price of oil that takes a bite out of their holdings.

According to Paris-based asset management giant Natixis, 54 per cent of respondents worry about further declines in the price of the commodity. But even with that awareness, investors also seem rather, ahem, optimistic about their future overall returns in the current market.

The study shows investors believe they need an average annual return of 9.3 per cent over and above inflation to cover their costs in retirement, and that 80 per cent believe this goal is achievable. Eighty-seven per cent, meanwhile, expect their returns this year will be the same or stronger than last year.

At the same time, however, 60 per cent say they struggle to avoid making emotional decisions during market shocks.

According to Natixis, what this all adds up to is the potential for investor panic when the impact of the drop in oil prices on portfolios become apparent.

“In different parts of the market there will continue to be unforeseen news, there will continue to be shocks … and at the same time (investors) admit that six out of 10 struggle to avoid acting on that emotion,” says Ed Farrington, executive vice president for retirement at Natixis.

Of course, the decline in oil isn’t exactly unforeseen news, as the survey shows. But looking at a ticker price on the business pages is different than looking at a negative return on your energy mutual fund.

And like the investor who sells stocks the day after the market crash, an emotional reaction to the bad news can set up a scenario where you miss the ride back up, says Farrington.

“The risk is they overreact to the news and make a decision that might cause them to have permanent loss of capital,” he says.

Managing investor expectations

Adding to this are the perhaps unrealistic expectations respondents have for their portfolios. Banking on 9.3 per cent above inflation (or even 9.3 per cent minus inflation) is a bit, ahem, optimistic.

This may be due to the human tendency to make decisions based on recent history rather than the bigger picture. Despite ongoing economic turbulence, the market returns over the past five years have been pretty stellar, in part because indices have been clawing their way back from the 2008 economic crisis.

“It’s getting close to where people are starting to believe that the last six years, they’re starting to project them forward,” Farrington says.

Those returns likely can’t continue over the longer term, and the lofty expectations make investors more prone to pulling the trigger on a move that might seem to make sense in the short term, but could be bad in the long term.

Instead, Farrington says, investors need to take a more realistic view of their portfolio, and plan for the unexpected.

And if things get really bad on the markets, maybe shut down the laptop and take that South American backpacking trip you always wanted to. It might be the best move for your investments.