Murphy said those giving investing and financial planning advice need to go over risk as well as other critical issues in a client’s financial plan. Some people are spending too much while others could comfortably spend more. “Our job,” he added, “is to help clients find the right portfolio allocation to meet their goals with a high level of confidence.”
The panel also discussed how investors and advisors can use both classical financial philosophy, based on logic, and behavioral finance theory, which recognizes the importance of emotion, and help clients benefit from both.
“You can’t let your emotions cloud your decisions very quickly about what you are about to do, rather than looking at the facts,” Massie warned.
How can advisors handle this investor potential for self-destruction?
Massie said that advisors should help clients stick to a strategy even though “human beings are inherently irrational. But this irrationality, one’s biases, can be predicted.”
People make systematic errors while investing because of subjective perceptions, Smith added. “Buying into financial strategies is usually based on logic—selling is often driven by emotion. So if you know where your potholes are, you can steer around them.”