Clients and their financial advisors have received an important lesson from a couple of the world’s central banks about the value of questioning assumptions.
First, the Swiss National Bank rocked the foreign exchange (FX) markets when the bank scrapped the currency floor between the Swiss franc and the euro. As a result, the franc soared, some speculators suffered heavy losses and a handful of FX-trading firms essentially were wiped out by their clients’ losses.
The Bank of Canada’s decision to cut interest rates the following week had less dramatic effects. But the move was no less surprising to the markets.
In both cases, the central banks made decisions that, while seemingly reasonable, were treated by the financial services sector as if they were unthinkable events. The reaction highlights the level of “groupthink” that plagues the sector, more than six years after a global financial crisis demonstrated the danger of insufficient skepticism, herding behaviour and other biases.
The timing of this latest lesson couldn’t have been better for Canadian investors. It comes just as RRSP season is kicking into high gear, when many clients are looking over their portfolios.
So, a sudden dose of uncertainty, such as the one delivered by the central banks, should remind clients of the futility of trying to predict markets in the short term and of the value of focusing instead on the long term. The markets’ reactions also highlight the importance of sticking to a fundamentally sound, disciplined approach to investing – one that can’t be completely upended by a single, modest policy decision.
Some clients might even be led to question the motivation behind RRSP season altogether. The value of RRSPs rests on the assumptions that your tax rate now is higher than it will be in the distant future, and that you’ll live long enough to draw down those assets at preferential rates. Revisiting those underlying theories might be enough to jar some clients to consider whether more of their savings should be devoted to tax-free savings accounts or to non-registered accounts. Hopefully, these recent central bank surprises will shake some investors from their dogmatic slumber.
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