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Tips to help clients overcome investment fears during a crisis

31 Jul 2020

We spoke to behavioural economist, Dr Greg Davies, to get his thoughts on helping clients overcome the fear of investing during times of market uncertainty. He answers adviser questions below and acknowledges that finding the right words in a crisis isn’t easy, but it is something that advisers can prepare for.

You can hear more from Greg in episode 2 of the Octopus Online Show. It’s now available to watch on demand here.

Dr Greg Davies

Behavioural finance expert, Oxford Risk

What kind of behaviours have you seen from investors during the recent pandemic?

With screams of plunging stocks and doomsday scenarios hitting the front pages, financial advisers have had their work cut out recently to help clients avoid making potentially costly mistakes.

It’s not difficult to understand why investors might be tempted to make short-term, irrational decisions given the circumstances. We’re only human, and we’re all hardwired to take action — especially when things are so uncertain and there’s a real lack of control over what’s going on. 

I think many investors are going through the motions when it comes to their investments and what to do with them right now. Market uncertainty like we’re experiencing doesn’t provide the sort of strong base from which effective decisions are made. But it is when knee jerk reactions are often made — however detrimental the decisions may be.

It’s worth remembering that everyone is different, too. Every client is likely to react differently to the current climate and so they need personalised guidance now more than ever.

How can behavioural insights help advisers with client interactions at the moment?

Coronavirus has highlighted just how big of a role human emotion plays in investments and economics.

With some investors looking to make a quick exit right now, it takes a lot of discipline and emotional neutrality to stay put or make new investment decisions. But that’s exactly where financial advisers come in. 

Good advisers will know through experience the types of reactions that market uncertainty will trigger in clients and how to prevent costly snap decisions from being made. In this sense, an adviser is instrumental to any investor as a rational, disciplined guide along a journey that’s likely to have many ups and downs.

There’s a handy tool from Oxford Risk that measures several key dimensions of a client’s financial personality that are crucial to understanding how they respond to a crisis. The Market Emergency Kit is a slimmed version of their full behavioural Financial Personality Assessment that’s free to use during the Covid crisis, and could prove very useful to talk through with your clients during this period of uncertainty. 

How can advisers use emotion to help clients feel more at ease? 

Helping clients overcome anxieties often starts with reminding them why they chose to invest in the first place. These goals usually have big emotional drivers, like helping grandchildren through university or something equally sentimental. 

It’s important to remind clients that an investment journey will take many twists and turns — showing someone where they started and where they are now in relation to their longer journey can be comforting. 

The language that you use is also something to think about. Emotional reactions can differ depending on the way things are framed. 

Talking about situations in terms of ‘gains’ for example, taps into our instinct to be bigger risk takers, whereas ‘losses’ tends to make us risk avoiders. And when we put that in the context of investing, it’s natural to want to buy when markets are good and sell when things aren’t looking good. This of course is exactly the opposite of a good long-term strategy. 

When it comes to knowing what to say and how to say it, there’s no one size fit all. We all experience anxiety in different ways, and so need personalised ways of coping.  

What are your top tips to help clients overcome investment fears during market uncertainty? 

  • Don’t focus on paper losses —remind your client not to stress too much about the current fluctuations. The valuation of an investment is only important when they need to sell, this is why getting the liquidity profile right for each client’s portfolio is crucial. 
  • Think long term — with market conditions as they are currently, it is good to remember that a lot of people will be focused on the short term. That ramps up the potential rewards available to those who can be patient and keep their focus on the long-term future. 
  • Use this opportunity to take stock — use this time as an opportunity to take stock of long-term financial plans. This will help satisfy the need for your client to feel like they are doing something right now, while also anchoring them emotionally on a longer time horizon.

To hear more from Greg on this subject, you can watch the second episode, of the Octopus Online Show here.

Personal opinions may change and should not be seen as advice or recommendation.

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