Over the past few years, investors have had more uncertainty than usual to contend with.
From the Covid-19 pandemic to the invasion of Ukraine, the resultant high inflation to the current turmoil in the Middle East, hopes for a return to “normal” have repeatedly been dashed.
Economic cycles have succeeded each other more quickly than usual, both equity and bond markets have experienced sustained corrections, and policymakers have had to scrabble to keep up with rapid shifts in the environment.
As all advisers are aware, even short periods of volatility can be challenging for clients, particularly those new to investing. And constant ups and downs such as those experienced in recent years can begin to take a toll on the emotional wellbeing of even the most seasoned individuals.
This is particularly the case given that many of the drivers of uncertainty will have been felt in clients’ workplaces, businesses and personal lives, as well as in their portfolios. Coping with higher prices and steep rises in interest rates may have compounded the mental health impact.
Working with a financial adviser will have helped.
Research suggests that clients benefit from the emotional value of financial advice, and as a result are more resilient and have greater positive emotions towards investing than those who do not receive advice – although it is also the case that investors with these attributes are more likely to seek financial advice in the first instance.
But when markets are volatile, clients can react negatively, despite their past experiences and willingness to take risk. With uncertainty becoming the new normal, how can we further support clients to manage the emotional shocks? Behavioural psychology provides some useful insights.
Provide the right kind of reassurance
Clients need to be reassured – but there is a right way to do it. People do not feel reassured when told that there is “no need to worry”.
In fact, simple reassurance may be counterproductive unless it considers the individual’s expectations, provides explanations about causality, does not blame the individual, and offers tangible help when necessary.
When times are tough, clients should be provided with explanations of their own circumstances and performance: support that allows them to take a different and less negative view of the source of concern.
Clients require easy access to insights regarding their investments, particularly during difficult periods.
A lack of knowledge into personal performance can lead to assumptions based on whatever information is available, regardless of how relevant it may be. For example, if a client is not able to check that they themselves are on track, a news headline about the hit to pensions from bond market volatility might take a heavy emotional toll.
