Living in the digital world, with its instantaneous access to information, has made us smarter and more empowered. In many ways, it has leveled the playing field for clients who now have access to much of the same information once only available to investment professionals. Information is so highly valued that it is churned out 24/7, accessible on any number of devices people carry around. For clients especially, this should be a good thing, right?
The barrage of headlines and hype around market events often leads to behavioral mistakes, like following the panicky herd over the cliff during a market selloff or frantically trying to buy into the market after a massive rally. Studies show it is the primary reason why investors consistently underperform the market.
Financial Advisors must intervene in their clients’ information consumption
One of your most important jobs as a financial advisor is to keep your clients from making costly behavioral mistakes by helping them control their emotions and keeping them focused on their long-term objectives. It’s not easy because emotions are very powerful. Humans are wired to act—to do something, anything—when fear strikes, and that includes the fear of loss in a market downturn or the fear of missing out in a scorching market rally.
You are your client’s financial coach, responsible for holding them accountable to their goals and strategy, keeping them focused on things they can control, and educating them on the ways of the financial world. That requires having frequent, frank conversations with your clients to help them understand what is important and what can be destructive to their achieving their goals.
Explaining why the media is not their friend
With most of the population wired to the internet, information has become a commodity, pumped out incessantly by media outlets whose goal is to make its information more essential. However, to be essential, the stories need to provoke emotions, and the easiest emotion to provoke is fear. In the media business, headlines sell, and negative or fearful headlines sell much more than positive ones.
Tell your clients that while it’s the media’s job to pump out as much information as possible, they don’t have to drink from the hose, especially when they realize that the sources of information don’t have their best interests in mind.
Bad news has little to do with long-term investment performance
The media and punditry won’t tell you that, while the news may be consequential in the short term, it has little, if any, impact on the stock market’s long-term performance. While this month’s investment returns or calamitous economic event may be consequential to our lives at the moment, their impact on the markets and, therefore, our portfolios over a 20- or 30-year time frame is so minimal as to cause nothing more than a tiny blip on your long-term performance.
Reacting to bad news hurts investment performance
When investors sell in reaction to a news event, it typically happens after a steep decline in the market. It’s imperative to make your clients understand that, while they might miss out on some further declines, they will invariably miss out on the best days of the market, hurting their long-term returns.
A recent example of this occurred during the 2020 pandemic-induced market crash. As the market tumbled to its worst one-month decline in decades, it also experienced two of the top ten return days in history. A day after the second-worst return day (March 12) in twenty years, on March 13, the market gained 9 percent. It happened again the day after the market crash hit bottom on March 23. After that, the market surged more than 40 percent in just a few months.
Investors who abandoned the market in early March, missing the five best return days during its recovery, lost 30 percent of their portfolio value, while those who ignored the noise and stayed put gained 40 percent over the next six months.
Keep clients focused on their financial pPlan
Clients who have conviction in a well-conceived financial plan and investment strategy are more likely to stay the course amid bad news. Remind your clients that the strategy you helped them create factors in bad news—such as rising inflation and interest rates or periodic market declines—and that market volatility is good for long-term returns.
Finally, tell your client that, while it’s important to stay on top of the news and educate yourself, they are much better off consuming it in the context of their specific financial goals and long-term investment strategy.
Just consuming financial information and data isn’t enough. It needs interpretation and analysis to process it into something useful. That is the value of a trusted, unbiased advisor to help clients make informed decisions.