EC Dalbar, 2016: Yes, You Still Stink At Investing (Tips For Advisors)

When markets decline, investors become fearful of total loss. Those fears are compounded by the barrage of media outlets that “fan the flames” of those fears. Advisors, need to remain cognizant of client’s emotional behaviors and substantially reduce portfolio risk during major impact events while repeatedly delivering counter-messaging to keep clients focused on long-term strategies.

Dalbar notes that during impact events messages delivered to clients should have three characteristics to be effective at calming emotional panic:

  • Messages must be delivered at the time the fear is present. As mentioned earlier, messages delivered before the investor actually experiences the event will not be effective. If the messages are too long after the fact, decisions will have been made, and actions taken that are very difficult to reverse.
  • Messages must relate directly to the event causing the fear. Providing generic messages such as the market has its ups and downs are of little use during a time of anxiety.
  • Messages must assure recovery. Qualified statements regarding recovery tend to fuel fear instead of calming it.

Messages must ALSO present evidence that forms the basis for forecasting recovery. Credible and quotable data, analysis and historical evidence can provide an answer to the investor when the pressure mounts to “just do something”. Providing “generic media commentary” with a litany of qualifiers to specific questions will most likely fail to calm their fears.

Understanding how individuals respond to impact events will allow advisors to get in front of their clients to discuss the planning, preparation and response to an impact event and recovery.

One thing that all the negative behaviors have in common is that they can lead investors to deviate from a sound investment strategy that was narrowly tailored towards their goals, risk tolerance, and time horizon. The best way to ward off the aforementioned negative behaviors is to employ a strategy that focuses on one’s goals and is not reactive to short-term market conditions. The data shows that the average mutual fund investor has not stayed invested for a long enough period of time to reap the rewards that the market can offer more disciplined investors. The data also shows that when investors react, they generally make the wrong decision.

The reality is that the majority of advisors are ill-prepared for an impact event to occur. This is particularly the case in late-stage bull market cycles where complacency runs high.

This complacency can be seen in the shift from active portfolio management strategies to passive indexing which is a hallmark sign of a late-stage bull market. When the impact event occurs, the calls to 1-800-ROBOADVISOR for calming messages and a plan to avoid major losses of capital will go unanswered. Advisors who are prepared to handle those responses, provide clear messaging and an action plan for both conserving investment capital and eventual recovery will find success in obtaining new clients.

The discussion of why “this time is not like the last time” is largely irrelevant. Whatever gains that investors garner in the between now and the next impact event by chasing the “bullish thesis” will be wiped away in a swift and brutal downdraft. Of course, this is the sad history of individual investors in the financial markets as they are always “told to buy” but never “when to sell.”

You can do better.

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Disclosure: The information contained in this article should not be construed as financial or investment advice on any subject matter. Streettalk Advisors, LLC expressly disclaims all liability in ...

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