This past week has certainly been interesting to say the least. I was busy providing additional, timely content for advisors in The Behavioral Finance Network to send to their clients to help them maintain proper perspective and ignore the noise. That is the very essence of “behavioral coaching.” But if it is not done consistently and in a timely manner, it may be interesting, but loses its ability to help someone get through the tough times.
Biases – In General
Biases do not work independent of each other. While curriculum will teach you to define and identify a bias in a case study, the reality is behavior is complex and multiple biases typically play on an individual’s mind and heart at the same time. One bias may be more prevalent, but anyone who thinks solving for one bias will do the trick is kidding themselves.
Biases are mostly negative, but there are a few biases that, when properly leveraged, can influence investors to make good choice, not bad. One of those biases is Mental Accounting. The other is the confirmation bias.
Confirmation Bias
The confirmation bias is when we seek out information that confirms our previous beliefs or current course of action. We also tend to weight supporting information heavily and discount or disregard disconfirming information. Investors who sold earlier this week may seeking articles to support why that decision was a good one, bearish and negative information will be desired news. And they will likely refute any information that highlights the positive (low gas prices, low inflation, low unemployment etc…).
That same bias can be leveraged by you to help your clients stay the course.
For all investors who have remained invested (hopefully all of your clients), they will want reinforcing information that what they are doing is right. They need it. In fact, if markets turn significantly more negative and all they are hearing about is how bad things are about to get, they may capitulate.
This is the time to reinforce the benefits of being a long-term investor, while also demonstrating empathy and compassion for how hard this could be to get through.
Reinforce their financial plan and investment strategy accounts for negative surprises. While this was not predicted, the fact that things wouldn’t go perfectly and we would face challenges is accounted for in the plan.
Make sure they know you own quality assets. Confirm that the companies they own (whether directly or through an ETF/mutual fund) will adapt to any changing circumstances and will get through this.
Praise your clients for staying the course up until now. Empathize that you know this is difficult, and reinforce that discipline and patience are qualities that only the most successful investors have, and encourage them to keep practicing it. Assure them that at some point in the future they will be well-rewarded for staying the course.
Related: The Flaws of Risk Profilers: Why They’re Failing Investors