The 2020 pandemic has paved a rocky road for investors and financial advisors for investing through COVID-19. It has also conjured handfuls of trigger words financial advisors know affect their clients negatively. Words like downturn and losses are more impactful now compared to previous years.
This year has proved how volatile the stock market truly is, but it is important to remember our actions are the only thing we have control over throughout the ups and downs. When the charts angle down a client’s immediate reaction could be to panic. This type of reaction is understandable, however, it is also unhelpful for their financial future. Everyone enters the market with similar goals, no one can predict the path of their investments. The pandemic will not disappear overnight, which is why it is important for clients to manage their emotions and aim to feel more confident investing.
Financial Advisors Should Use Behavioral Finance
There are many market fluctuations in our horizon, so it’s best to be emotionally prepared. Take President Trump’s COVID-19 diagnosis for example. When it was confirmed the Dow fell over 400 points, then the day he left the hospital the Dow jumped over 400 points. What does this say about the stock market? That it is an entity perpetually on edge.
When clients lean toward making precarious decisions a financial advisor should be consulted. Whether an investor is new to the game or fully seasoned, they are still human and do not always make perfect decisions. Any other added emotions could make room for irrational selling choices and huge losses. In cases such as these, behavioral finance is often implemented to keep client’s minds at ease and their hands away from any big red buttons.
How Behavioral Finance Techniques Help Clients
When advisors use behavioral finance techniques when investing through COVID-19 they tend to save clients from making hasty, sometimes regretful, decisions. After a financial plan has been mapped out, it is important to adhere to it. There is not a mathematical equation or approach to helping a client keep their composure, so patience and hard facts are key to decision making.
300 advisors took a survey for the BeFi Barometer 2020 and the takeaway was eye opening. 81% of advisors utilized their skills in behavioral finance for the good of their clients’ portfolios. Not only that, but many biases related to media, loss aversion, and risk versus reward can manipulate a client’s investments.
Don’t Let Bias Get in the Way of Rebalancing while Investing through COVID-19
As of 2020, 5 major biases have stood out more than the rest. Here is the breakdown:
- 35% – Related to recent news events or experiences
- 30% – Loss aversion or “playing it safe” and accepting less risk
- 27% – Investing too close to home, as in keeping investments solely in U.S. companies
- 26% – Reshaping financial goals based on personal definitions of “wealth”
- 26% – Making decisions based on how information is framed
Every investor can forget they have the ability to review quantitative stats on the market and perform with that handy information.
Investment decision making shouldn’t be led by short-lived news headlines or heated media topics. Oftentimes media can blow stories out of the water simply for audience participation and advertisement opportunities, not for the good of investments. On the other end of things, by using behavioral finance, advisors can guide clients to invest outside their comfort zone. There are risks in buying stocks, but if a client were to play it too safe they may not see rewards, or gains, at all. Rebalancing and reallocation is a powerful and smart way to navigate the market and a client’s investments.