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Most people assume that the most powerful human emotions are love and hate, but in the field of psychology, there’s considerable debate as to which emptions carry the most weight.
It’s a tough question to answer because various emotions have varying effects on different people. Some folks love easily and quickly while others are more reserved and take awhile to get there. Love is just one example, but the point response to the same emotion isn’t linear.
However, there is emotional clarity in the world of investing where fear and greed often loom large. A strong case can be made that no other emotions figure as prominently into investing as do fear and greed. Advisors aren’t psychologists, but there is some burden on them to ensure that clients aren’t vulnerable to much fear or greed.
Of the two, greed is arguably the easier one to comprehend and the one with more uniformity across clients. Put simply, a client sees risk assets rising and friends and colleagues profiting and is apt to want more of that action. On the other hand, fear affects different people to varying degrees. One certainty is that in light of recent events, some clients are feeling more angst and fear than usual and it’s on advisors to help quell those emotions.
The ‘V’ Word Is Spooking Clients
Amid President Trump’s tariff plans and some disappointing earnings reports from some bellwether companies, some clients are starting to get skittish meaning they may be more apt to lean on advisors than they are during more sanguine times.
“Investing is inherently a human endeavor, making an understanding of behavioral biases and sentiment crucial. While investors can’t completely eliminate these biases, increased self-awareness can help mitigate their impact,” notes Brie Williams, head of practice management at State Street Global Advisors (SSGA).
Data confirm that when market volatility increases, investors working with advisors feel better equipped to weather those storms than do their self-directed counterparts. That’s a significant affirmation for advisors and one that should not be lost on prospects.
As SSGA points out, 77% of advised investors believe the amount risk they’re taking on is suitable while just 9% believe they’re incurring too much risk. Fourteen percent believe they should be taking on more risk. For self-directed investors, those percentages are 58%, 17%, and 25%. Focusing on the right amount of risk category, it’s clear advised market participants find a level of comfort that often evades their do-it-yourself counterparts.
Helpful Tips to Pass on to Clients
In additional to acquiring some behavioral finance skills and having the decision-making tools in place to guide clients through turbulent times, there are other steps advisors can take to help keep calm and carry on when volatility rises.
A good place to start is putting losses into context. For some investors, it may feel as though markets do nothing but go up, but the reality is much different. And while losses sting, they can be no more than bumps in the road within the confines of properly structured, long-term portfolios. Another relevant idea is encouraging clients to limit consumption of “noise.”
“Encourage clients to limit exposures to background noise – such as financial news and social media – which can distract from long-term performance trends and lead to unnecessary stress,” adds Williams.
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