Written by: Ana Larreta
Uncertainty and volatility often lead people (and investors) to make irrational decisions that they tend to regret once conditions move back to a normal state.
Here are some of the most common mistakes investors make during highly volatile times:
As a portfolio manager or financial advisor, how can you speak to your clients to help them alleviate their anxiety and avoid these mistakes?
Show them that you understand and support their feelings. Validation doesn’t necessarily mean agreeing with their fear, rather it involves recognizing and accepting their concerns and emotions.
As you validate your clients’ feelings, make sure you follow the six validation levels identified by Psychologist Marsha Linehan , Ph.D. in chapter 17 of “Empathy Reconsidered: New Directions in Psychotherapy ” by Arthur C. Bohart and Leslie S. Greenberg.
Cognitive Behavioral Therapy
Once you have validated your clients’ feelings, you may want to engage them in more positive thinking by using a simplified version of what psychologists call cognitive behavioral therapy.
According to mental health and well-being nonprofit HelpGuide.org , “Cognitive behavioral therapy (CBT) is the most widely-used therapy for anxiety disorders. It addresses negative patterns and distortions in the way we look at the world and ourselves.” The basic premise is that our thoughts —as opposed to the events themselves— affect the way we feel.
You may want to use the cognitive behavioral approach to identify the negative thinking patterns of your clients that contribute to their anxiety, and replace them with more positive and realistic thoughts. This communications process involves three steps:
An example is shown below:
Challenging Investors’ Negative Thoughts
Negative thought #1: What if volatility remains and markets don’t ever recover?
Cognitive distortion: Predicting the worst.
More realistic thought: Volatility is a temporary condition and markets tend to recover from downturns, so it’s unlikely that the opposite will happen now.
Negative thought #2: If I lose the value of my investments, it will be terrible!
Cognitive distortion: Blowing things out of proportion.
More realistic thought: Your investments may lose value temporarily, but it is likely that they will revamp in the longer term. Our investment strategy is doing what it has been designed to do, and as market conditions improve, so may the value of your investments.
Negative thought #3: I’ve made poor investment decisions.
Cognitive distortion: Jumping to conclusions.
More realistic thought: Stay focused on the long-term. You didn’t sign up for selling low. This may be a good opportunity to buy cheap and remain patient as the markets begin to recover.
This communication exercise may help change investors’ negative perceptions during volatile times. As Ph.D. Psychologist Karyn Hall says, “… perceptions are often inaccurate, particularly in emotionally charged situations.”
Hall explains that perceptions lead to confirmation bias. “When you have an idea in your mind you tend to look for evidence that supports that idea and not pay attention to evidence that says the idea isn’t accurate.” Therefore, it is important that you provide your clients with information that they may overlook in times of uncertainty, such as historical data showing how the markets have recovered from previous downturns.
These validation and cognitive behavioral therapy techniques may help you communicate more effectively with clients during times of high market volatility. Effective communication strategies during sensitive times may strengthen relationships and build greater trust.