• Discuss the concepts of risk aversion and loss aversion with them to demonstrate how these can bias decisions.
• Review risk budgeting concepts like opportunity cost and risk-adjusted return, to support more intentional decision-making.
• Frame decisions in a relative context and connect that to the financial life—the intersection between things that matter and the things we can control—to reinforce a thoughtful buy/sell/hold discipline.
• Discuss current events within a broader historical timeframe to illustrate how past market declines can help us look at current events more rationally.
Further, to balance the emotion quotient (EQ) and the intelligence quotient (IQ) in investment decision-making to help clients achieve suitable risk levels and meet long-term goals:
• Demonstrate empathy, listen actively and show patience during the decision-making process. Ask open-ended questions. Discuss what’s important to them before bringing up what you think is most relevant.
• Look for opportunities to tailor the investment solution to personal circumstances and align emotional constructs (such as family, security and independence) as a force for action.
• Review the downside protection plan when emotions are running high—talk about what to do, or what not do, if there is a sustained downturn.
Irrational Behavior Is Commonplace, Even Among The Smartest Investors
Emotion occupies a powerful position in investment decisions. It drives human behavior. However, all of the rational financial discussions in the world won’t propel an investor to their goals if they are not aware of where their emotions may come into play.
Periods of volatility are a good time to meet with clients to review their overall financial situation. This is an opportunity to review whether they are on track and to discuss optimization if needed. Decisions framed within the client’s overall financial plan may help to keep them feeling engaged and more confident. Even if markets continue their ups and downs and milestone events are canceled, clients can become more resilient, adapting to volatility today and beyond.
Brie Williams is head of practice management at State Street Global Advisors.