Recently, my firm published a whitepaper called “Don’t Get Whacked by Behavioral Pitfalls” that used quotes from popular television show “The Sopranos” to relay investing lessons. The paper brings up a number of good points about how certain investing behaviors can be harmful to a portfolio’s health, and its unique approach could offer financial advisors a creative way to talk to clients about avoiding self-defeating investing decisions.
The main takeaway from this paper is that we are all susceptible to being heavy-handed when it comes to making changes to our investments, and there are data points that support the dangers of giving in to the temptation to move money around in volatile times.
From my perspective, there are three primary behaviors, as outlined by this paper, that could be detrimental to an investor—financial advisors would be wise to take a page out of Tony Soprano’s book and nip these behaviors in the bud before things get out of hand.
Here is my take on what lessons financial advisors can take from the paper, along with insight on how to talk through these lessons with their clients:
1. Don’t be a helicopter investor.
With just a swipe of the finger, investors can check in on their brokerage accounts and see how they’re performing. It is quick, it is easy and it is in real time. Usually those characteristics are a benefit to what we’re trying to accomplish, but in this case quite the opposite may be true. The market has ebbs and flows, and short-term volatility may not be an indication of long-term growth. While staying on top of and proactive in one’s finances is generally good practice, being hyper vigilant has the potential to cause an investor to make impulsive decisions.
If your clients are obsessively checking in on their accounts, that means they want to be an active participant in their financial process. Therefore, they will likely appreciate open communication and education on your part. Touch base with them often, talk them through market events, reach out in times of volatility and collaborate with them often. Be responsive to their concerns, remind them of their long-term goals and explain to them why staying the course could have a greater reward in the end. Communication, communication, communication.
2. Timing isn’t always everything.
The market has its peaks and valleys, and some investors follow it closely and try to time their trades accordingly. They aim to buy when it’s down and sell when it’s up. Investors might think they are protecting their assets by moving in and out of the market in this way, but that isn’t the case—and financial advisors need to be there to show them the way.
Remind these clients that the market moves, and it is very difficult to predict. Show your clients why staying invested over time can make sense, and give them the data and visuals to understand the damage that trying to time the market can have on their returns. Help these clients take a step back, and teach them to look at the bigger picture. Rather than focus on short-term movements, what these clients should really be paying attention to is the more dramatic shifts up and down, and those can only be seen by looking at the market from a higher level. It is important that financial advisors keep in mind that clients who try to time the market might actually wind up late to the party.
3. Put a ring on it.
For some investors, their anxiety may manifest in the form of doubt. Perhaps you have worked closely with them on a financial plan, and maybe you have patiently explained to them the rationale and the benefits of the agreed-upon plan. You may feel that you have taken all the right steps, but then your client gets cold feet and second guesses their decisions. They start looking again at all of the other alternatives and trying to find the perfect, sure-thing tactic, rather than committing to the right plan for them. Suddenly the client realizes that they aren’t ready to settle down with one financial plan.
These kinds of clients are also at risk for missing out as a result of their indecision, and they are the ones who really can benefit from working with a financial professional. If your client begins to show a reluctance to commit to a plan, talk to them about why making and sticking to a decision may be better for them than constantly trying to make tactical choices. Show them that, over time, a buy-and-hold approach can work in their favor in comparison to a back-and-forth approach. Keep your client focused on the future, and help them to ignore their wandering eye.
Investors rely on financial advisors, and not just for plugging in numbers and building a plan. Rather, investors look to their advisors to guide them through their anxieties and keep them apprised of the strategies employed in their plans. Everyone wants to grow their wealth and make the most of their investments, but that mindset can lead investors to behaviors that have the opposite effect. Financial advisors should be aware of these behavioral pitfalls and, much like Tony Soprano, know how to take care of them.