Advisers and planners should encourage clients to avoid falling into the behavioural trap of thinking the good times will always roll, a senior investment manager has said.
Dan Brocklebank, head of UK for Orbis Investments, said the ride of the magnificent seven US tech stocks may have lured equity investors into a false sense of security in recent years.
He warned against investors becoming "overly influenced" by the numbers over the past few years, but the risk of ending up on the wrong side of a market slump should be made clear.
Brocklebank told FT Adviser the job of a portfolio manager was to make sure things are diversified enough to create a robust portfolio that can withstand such shocks.
He said: "Every once in a while you get these whopping Lollapalooza effects, as Charlie Munger has described it, where everything a range of factors combines and headline performance numbers end up being negative, and you need to explain that [to clients].
"You have to then make sure that at the times when it is most tempting to redeem, ie, after periods of underperformance, is the time when clients have the trust and confidence in your approach to remain invested."
He said these courses of action may seem counterintuitive, and agreed that it can be a "difficult conversation sometimes" to have with clients, because "as humans, the pain of the underperformance is real".
But clients need to be reminded that no funds, investments or investment styles will outperform forever. Brocklebank added: "To assume that is when it gets dangerous.
"It's also tempting for people to charge in on the basis of three or four years of good performance, so this is where advisers and managers need to make sure their [clients' ] expectations are reasonable."
His comments came after he told FT Adviser last week (October 1) that many management groups had been lured by the attraction of the so-called 'magnificent seven', the US technology giants dominating global equity indices, and this has skewed correlations among portfolio managers.
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In a recent podcast for FT Adviser's Better Business section, which carries an indicative 30 minutes' CPD, advisers spoke of ways they can help their clients recognise their behavioural biases in order to achieve the best possible outcomes.
