A quick glance at major market indices showed that equity markets had stunning first five months in 2013. However, June is a different story altogether, the FTSE fell by 7% so far in June alone!
The first 5 months of the year saw major markets producing returns that most investors would be happy with for an entire year, never mind the underlying weak growth and deep problems in the global economy. Many investors talked the bearish talk, yet they walked the bullish walk.
However, what is worrying is the propensity among both fund managers and advisers to take credit for how well their portfolios performed in rising markets. Contrast this to the difficult periods of 2008 – 2011; the ‘market’ was blamed for poor performance witnessed by clients during that period. And now, after a very difficult month, it seems we are back to blaming the market, again!
This phenomenon lends itself to what behavioural psychologists call “self-attribution bias.” This is something commonly associated with investors but dare I say, it’s equally common among professional investment managers and advisers.
Think about it from a client’s point of view; we take credit for good performance in a rising market but blame the ‘market’ when the tide turns. How do clients feel about this – we credit skill/expertise for success when markets are rising but blame the market when conditions are less favourable.
This is even more pertinent as the market rally seems to be over, many clients would want an explanation why their advisers’ investment prowess hasn’t stopped their portfolios from taking a pounding.
The lesson from this is: it is important to be circumspect in the way we attribute performance, and to manage clients’ expectations, especially in rising markets. This puts the adviser in good stead for when, not if, the market takes a different turn.