It’s that time of the season
The shorter, darker days of fall can affect your investments, research by a U of T finance prof finds
This past weekend’s clock “fall back,” with the end of daylight time, really is a dark time. Literally.
It’s also par for the season and this gloomy cycle in our yearly calendar that makes me want to yell at the sky where the sun used to be.
I must be dealing with the SADs.
Seasonal affective disorder is a type of depression we can go through when our exposure to sunlight changes. Researchers say SAD can lead to a low mood, restless sleep and loss of interest in the fun stuff in life.
I knew humans experience SAD — but what I didn’t know is that SAD can make your investment portfolio depressed, too.
Enter the research of Lisa Kramer, a finance professor at the University of Toronto. She specializes in the interdisciplinary field of behavioural finance, which blends psychology and economics to study markets and financial decisionmaking.
It turns out SAD sufferers, and others who experience seasonal mood fluctuations, may be harming their finances as the seasons change.
“Starting with fall equinox, what we find in financial markets is that individuals are less interested in holding risky assets and more interested in holding safer assets as they become influenced by this reduction in light,” says Kramer.
“We become averse to holding stocks, and perhaps more interested in holding safe bonds.”
What’s the problem with taking on less investment risk?
“The implication is that people who are willing to hold those riskier assets during those darker seasons earn a much higher return on average than those people who sit out that time of the year,” she says.
Financial risk tolerance relates to the amount of market volatility — all the ups and downs — an investor can handle, along with their ability to deal with an investment loss.
Financial planners often gauge investor risk with a client questionnaire, and categorize investing styles as aggressive, moderate or conservative.
An aggressive investor with a high risk tolerance is far more willing to risk losing money for potentially better results, while a conservative investor with a low risk tolerance prefers investments that maintain their investment.
But based on Kramer’s study, “Seasonal Affective Disorder and Risk Aversion in Financial Decision Making,” investor tolerance for risk may have a seasonal component and be far less static than the one-time answers provided by a financial planner’s client questionnaire.
“If somebody chooses a portfolio in the middle of summer, perhaps when they’re feeling most inclined to take financial risks, they need to be aware that there might come a time, maybe as soon as six months later, when that portfolio looks way too risky,” she says.
“Our tolerance for financial risk is probably not a stable trait. It changes over time and just having that awareness can help guide us towards a long- term investment strategy that is going to be robust to changes in our risk preferences.”
So what’s an investor who is affected by seasonality and a varying tolerance to financial risk to do?
“Markets will often drop in the fall and some investors just can’t resist the impulse to sell everything. That’s just the worst possible thing to do,” says Kramer. “We end up making the worst mistakes when we act impulsively in response to what’s going on in the markets.”
“The way to get around all of that is simply to buy and hold, develop an investment strategy that involves regular contributions to the portfolio, maybe periodic rebalancing every year or two in consultation with a professional or in accordance with a long-term set of goals,” she adds.
While we cannot prevent the shortening of days in the winter months, nor the jolt from the end of daylight time, awareness of how seasons can affect mood and tolerance for financial risk can help you make the right investment decisions.
Checking in with a financial planner to re-evaluate your risk profile is a solid way to be sure your portfolio meets your long-term needs.
And having a plan you can stomach year-round can let you hibernate through the winter until the sun shines again.