'In a crisis, we can either look at the danger or the opportunity'

The markets – if not the world - may have moved on from COVID-19 but the ramifications from last March are still reverberating around many advisors’ heads.

For Ed Simpson, Investment Advisor, Zagari Simpson & Associates, Mandeville Private Client, the speed of the rebound took him aback, but it reinforced the importance of controlling one’s emotions and, crucially, that of your clients.

The record books now state that it took just 126 trading days for U.S. markets to fall 35% and to execute a full recovery. Canadian markets followed that trend but took longer to get back to its peak. Astonishingly given the level of decimation, U.S. markets then went on to greater all-time highs in 2020 and 2021.

Simpson said he and his team have always dedicated time to ensure clients understand the principles of wealth creation and the investment framework that guides investment recommendations.  Therefore, when market fluctuations occur, clients would understand the importance of controlling one’s emotions and stay disciplined towards that framework.  

Simpson said: “We always reinforce with our clients that life is not linear and while no one knows precisely when market declines will occur, we know they will occur and when they do, we must always defer to our investment framework and remember the Chinese adage: crisis equals danger plus opportunity.”

He added: “In times of crisis, we can either look at the danger, or we can look at the opportunity. It is human nature to focus on the negative headlines and without a sound investment framework we may react dangerously by selling positions at inopportune times.

“But in every crisis, there's actually opportunity, and the best time to invest is when there’s actually the lowest amount of risk - when the market corrects.”

When the market crashed, Simpson told clients he understood why they wanted to focus on the danger and uncertainty. Instead of panicking in the headlights, he used the downturn as an opportunity to remind clients that market volatility it is not reflective of the quality of the underlying business; volatility is often simply a reflection of the forces of supply and demand and the emotions of the day. 

When crisis presents itself, he always defers to his investment framework; if the company continues to check all the boxes, then it is still a quality business and “we should maintain the position and build on it if possible”.  

Simpson also used the downturn as an opportunity to rebalance portfolios and put clients into areas he thought would be well positioned to benefit from the rebound. 

He said: “In all honesty, the rebound came much quicker than I or anybody expected. That just goes back to why controlling your emotions is so imperative, because the market moves so quickly today. When there's a significant discount, it doesn't stay on the table for very long. Maybe in the past, clients would want to time the market, get out and get back in later. But from peak to trough to peak again, it was only four months.”

Simpson and his team work hard to ensure clients understand what they own. The fear of not knowing what’s in a mutual fund, for example, only adds to the tide of emotions when stocks plummet. If you do not understand what you own, you are simply speculating not investing. 

If the client’s goal is the creation of wealth, having a solid investment framework is paramount. This includes owning a few high-quality businesses that you thoroughly understand, that are domiciled in long-term growth industries, include prudent use of leverage, and are held for the long run. In times of volatility, having a framework plays such an important role in the control of one’s emotions.

Montreal-based Simpson believes that this period emphasized the importance of having a strong advisor who can explain the investment and intellectual framework behind these decisions.

“Financial advice today is so important because there's so much information out there, it's hard to decipher what's good and what's bad,” he said. “You look at what happened this year with things like GameStop and all the hype, and people are watching other people get rich really quickly.

“But that doesn't last; that’s not something you can rest your cap on. It’s a trend. A solid advisor helps clients to understand the difference between speculating and investing so they are able to block out the noise and stay focused on wealth creation.”