10 destructive behaviors of ‘emotional investors’
10 destructive behaviors of ‘emotional investors’
Behavioral biases exist and subconsciously influence us, many times at a significant cost. The good news is that there are tools that financial advisors can use to identify and reduce the impact of biases—both for themselves and for their clients.
Financial advisors and their investor clients have faced a period of huge market swings in 2020 and great investment uncertainty in the fallout of the COVID-19 pandemic. (Not to mention the emotional burden of concern for loved ones, for their safety, and for those families around the world who have lost a cherished family member.)
The American Association of Individual Investors (AAII) developed Figure 1, showing the market’s roller-coaster ride for the period from late February to late April 2020. The organization noted, going back to 2011, “the largest number of days in a single calendar year with a closing change in the S&P 500 index of greater or less than 2% was 35—for the year of 2011. … We’ve already experienced 30 such days for 2020.”
Source: American Association of Individual Investors (AAII), data through 4/22/2020
With the CBOE Volatility Index (VIX) hitting elevated levels not seen since the financial crisis, and major U.S. equity indexes rapidly entering bear market territory, Q1 2020 made managing risk—and investment expectations—a more urgent consideration for financial advisors and their clients.
However, this was really nothing new. For some time, a top concern of financial advisors of all stripes has been the management of volatility. This became particularly pronounced after the market drawdown of almost 20% in Q4 2018.
Source: Eaton Vance Advisor Top-of-Mind Index (ATOMIX), spring 2019
While this study has not yet been updated for 2020, there is little doubt that the results will show that “managing volatility for clients” has become of even greater concern for financial advisors. Eaton Vance wrote in an April 23, 2020, post, “Market participants will attempt to reconcile the sharp recent market rally with what looks like to be a fairly prolonged extended economic contraction and slow recovery in the United States, so we would expect volatility to continue.”
In a volatile market environment, investors become even more prone to emotional investment decision-making, often at great cost to their long-term investment health.
Another post from Eaton Vance’s advisory blog talks about the “siren song” that drives investors to panic selling and then chasing returns for fear of missing out on a market recovery, both actions usually coming at exactly the wrong time. Investors, the firm says, “validate their desire by looking at data from recent bear markets without understanding the ways this bear market is unique: It came at the end of the longest bull market in modern history, and it’s being driven by an exogenous shock.”
Jay Mooreland, MS, CFP, is an expert in behavioral finance and coaching financial advisors. His objective is to help advisors enhance value in their advisory relationships—guiding clients via behavioral finance principles to make better financial decisions.
Mr. Mooreland founded The Behavioral Finance Network and has created several behavioral applications for advisors’ practices, as well as offering valuable coaching programs for advisors. A sought-after speaker on the topic of investor behavior, he has published several articles in industry journals and is the author of “The Emotional Investor: How Biases Influence Our Investment Decisions…And What You Can Do About It.” His website, The Emotional Investor, and his blog offer frequent observations on behavioral finance in the context of the current market environment.
Mooreland’s 2015 book, “The Emotional Investor,” came about in part because of the 2007–2009 financial and economic collapse around the globe.
It is particularly relevant today.
In the introduction to the book, he shares his story of disappointment, self-discovery, and the search for solutions to some of the behavioral issues that plague retail investors and financial advisors—both in times of crisis and in roaring bull markets:
In graduate school he focused heavily on behavioral finance, seeking to better understand emotional influences on investors. He says, “That’s what this book is all about: learning to subdue emotional influences and make more deliberate and thoughtful financial decisions.”
In “The Emotional Investor,” Mooreland cites 10 key behavioral influences that lead many people to consistently poor investment decision-making:
Mooreland’s comprehensive road map for investor improvement focuses on three key points:
- Recognize and understand behavioral pitfalls and consciously acknowledge (and try to avoid) their influence in future investment decision-making.
- Don’t be afraid to embrace and learn from mistakes of the past. Be disciplined in avoiding future mistakes of process. However, recognize that even the best process will not always be successful, but long-term discipline in sticking with a sound process usually will.
- Seek the guidance of a qualified investment “trainer,” a financial advisor or wealth manager. Recognize that much of their value will be in behavioral coaching and their advocacy for sticking with the objectives of a well-defined financial and investment plan.
On the value of financial advisors, Mooreland writes,
Mooreland concludes, “Emotional investing may feel good, but thoughtful investing is good.”
Editor’s note: Advisors and their clients would both benefit from reading “The Emotional Investor,” available at Amazon. Financial advisors may want to explore the programs Mr. Mooreland offers at The Behavioral Finance Network.
David Wismer is editor of Proactive Advisor Magazine. Mr. Wismer has deep experience in the communications field and content/editorial development. He has worked across many financial-services categories, including asset management, banking, insurance, financial media, exchange-traded products, and wealth management.
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