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Investment advice in turbulent times

10/03/2020

The coronavirus clearly demonstrates to investors that exogenous shocks have a substantial impact on financial markets. Given the fear of a pandemic, stock markets around the world have been plummeting for two weeks. On Monday, the Dow Jones lost 7.8%, marking one of its largest daily losses in history. Additionally, the VIX, also known as the “fear barometer”, recently reached its highest level since the financial crisis in 2008, showing that market volatility is exceptionally high. Investors sell their stocks in panic and buy safe-haven investments instead. Considering historical data, this behaviour is extremely counterproductive because after major market declines, the probability of rising prices increases again. Therefore, it is usually worth holding out.

Panic selling, on the other hand, results in a deviation from the strategic asset allocation, which should be able to withstand turbulent market phases. Especially in such uncertain times, personal advice from a “Trusted Advisor” is essential to ensure that investors do not act rashly and make decisions with serious consequences. But how can financial service providers ensure that investors receive adequate advice in the event of a stock market crash and, at the same time, a call for “social distancing” by the Federal Office of Public Health?

This requires an advisory solution that meets two essential conditions:

On the one hand, the possibility of major capital losses (“fat tails”), as we are currently experiencing, must be taken into account when advising clients. A forward-looking advisory process that works with scenarios and appropriately reflects extreme events gives clients a realistic picture, as opposed to an approach based on historical data and the assumption of normally distributed returns.

On the other hand, personal advice should also be possible through digital channels, especially during events which call for “social distancing”. However, this type of digitised advice only works if an advisory solution can be used not only in direct contact with clients but also in the context of a purely digital exchange between client and advisor. The interactivity of the advisory solution and the traceability of the recommendations is a decisive factor in making the personal, digital interaction a complete success.