05 Jul How to reassure investors in times of volatility?
During heightened market volatility, it’s common for emotions to dominate the investment decisions. By understanding this behavior, advisors can guide the client conversations in ways that reassure them. Here are some tips to help investors blinded by the fear of risk.
Since the pandemic, the market has experienced a high level of turbulence, while the political climate and the geopolitical situation in Europe have only added fuel to the fire. This explains why volatility has dominated investment conversations for the last couple of years, resulting in current market conditions that have sowed panic among investors.
In these periods of market panic, even the most experienced investor may focus solely on the potential risks rather than on his long-term investment strategies, leading him to lose money and not achieve his goals.
In behavioural economics, the trend is called “myopic loss aversion.” This client behavior is a tendency for investors to adopt a short-term view of their investment leading them to react overly negatively to recent losses, ultimately at the expense of long-term returns. Loss aversion is part of prospect theory, a cornerstone in behavioural economics, and involves keyvbehaviors.
3 key client behaviors associated with market volatility
The reality is that even in the most stable of markets stock prices can change due to prejudice, partisan, or emotional decision-making. However, in the periods of market volatility, an investor can be affected by the momentum around him, propelling him to buy a new investment fund or sell off existing assets in knee-jerk style. Observing the volatility of the financial markets can also create additional stress for investors, triggering some key behaviors as outlined below. Collectively, this leads to periods of market panic.
This is wherein individuals in a group act collectively and irrationally without rational direction, driven by emotion: greed in bubbles and fear in crashes. Ultimately, herding behavior destabilizes market conditions further and increases the instability of the financial system (i.e. increases market volatility).
This is an investor behaviour characterized by decision-making based on fear, rather than a logical response to information—in this case, uncertain times. The behavior is triggered by an investor’s fear of losing money or not meeting their long-term investment goals. For instance, the fear of losing one’s retirement funds or a good opportunity.
This investor behaviour refers to a phenomenon where reals or hypothetical loss are perceived by a client as psychologically or emotionally more severe than the equivalent positive returns. In other words, it’s a behavior wherein people do not feel gains and losses equally. Unsurprisingly, this phenomenon is far more prevalent during periods of volatility. The biggest potential implication of loss aversion is that it can make investors more reticent to taking risks, and ultimately, make them veer from their long-term investing goals.
Tips to Help Reassure Investors in periods of Volatility
Challenging market conditions will always be a concern for investors. Being a great portfolio manager also means being able to help them navigate the difficult behavioural components involved in investing in a volatile market, and ultimately, come out on top.
“Volatility is Far from Synonymous with Risk,” Warren Buffet
While the current volatility does need to be factored in when managing portfolios, it’s also crucial for financial advisors to put this phenomenon into perspective for their clients by clarifying the differences between volatility and risk. Indeed, while volatility is in the DNA of the market, a risk is just an element that can be minimized to prevent negative client outcomes, but never eliminated.
Some Level of Volatility is Normal and Healthy
It’s important to remind investors that some level of volatility is a telltale sign of a normal and healthy market and not inherently a reason to panic. Financial advisors and portfolio managers can further help appease investors’ fears by offering context for the market swings; this can go a long way to reassuring clients about their long-term financial security and help them see the current situation as a temporary one. This same exercise can also open up new investment opportunities for clients who are less afraid of the stock markets and its inherent fluctuations, and who may be open to adopting a more proactive approach.
Be Upfront and Be Present
In order to prevent triggering myopic loss aversion and its associated behaviors, being present, accessible, transparent, and reassuring is crucial for an advisory team. It’s also key to helping your clients weather those uncertain times.
This is best accomplished by sitting down with your client to do portfolio reviews and going over their overall financial goals with them in detail to demonstrate that they are still aligned with their financial aspirations for a long time horizon. And if it turns out they are not aligned, then it’s crucial to walk them through the changes you are proposing to their investments.
Portfolio Diversification to Minimize Risk
Even in the best of times, there is ultimately no way to predict how the market will behave. This is why diversification is perhaps the best tool investors have to protect their portfolios in periods of volatility. As wealth management professionals, it’s important to tell clients about market volatility and discuss diversification needed to both protect their portfolios.
Technologies can help investor weather the storm
To make advisor relationships relevant for investors, professionals must give good advice and reassure clients. To do so, they must rely on powerful technological tools.
Automated portfolio rebalancing solutions
Today’s advisors have tools that make their jobs much easier and more efficient. One of the essential new tools in these uncertain times is an automated portfolio rebalancing solution that allows you to stay aligned with mandates within the investor’s investment objectives and risk acceptance.
This category of tools is customizable to analyze the investment holdings within the portfolio and suggest adjustments to the manager based on predefined parameters. A good automated portfolio rebalancing solution saves advisors time by rebalancing multiple accounts, joint accounts, relationships or sleeves at the same time and allowing the advisory team to evaluate the proposal before sending it to market.
Portfolio management solution
Powerful portfolio management solutions are another very useful tool in times of fluctuations. They allow advisors to manage and prioritize client communication, access client positions and history with a few clicks, and base decisions on reliable and relevant data.