On October 25th, I posted some coaching perspectives on volatility in The Behavioral Finance Network. This is a network of forward-thinking advisors who seek to proactively coach their clients and connect deeper with them. The feedback on this particular post was quite good.
When Behavioral Coaching Works
One caveat with behavioral coaching is that it is most beneficial when done proactively and consistently over an extended period of time. You may get the “ah hah” moment the first time you teach something, but thinking is a habit. And within a few days, investors will default back to their skewed way of thinking about investments. If we wait until the client contacts us to coach them or we don’t do it consistently, don’t expect very good results.
The Three Perspectives
1. Market Sell-Offs Are Normal. The media makes every downward move seem like it is extraordinary. That this time is truly different than all the rest. 2017 was one of the least volatile years on record. 2018 is more normal. This is nothing extraordinary; it is simply regression to the mean. We routinely have negative years in the market. Just because we have gone several years without a negative year doesn’t mean we won’t in the future. We need to stop obsessing in the moment and take a longer term look (look at how much we have made in the last 9 years – including 2018!)
2. Markets Are Unpredictable. This is one of the most frustrating parts of our job. It’s not just that very intelligent people are pretending to know the future, it’s that our brain craves certainty. And it can’t distinguish between real certainty and the illusion of certainty. Every now and then someone will get it, and they will become a star on CNBC. Perhaps CNBC should also interview broken clocks during the two times each day they are correct on telling time! The very fact that no one can consistently predict the market proves it is unpredictable. The sooner your clients actually grasp this concept, I mean really grasp it, the easier your job will be. (BTW, Behavioral Finance Network members will get a fun and impactful 2019 forecast they can share with clients at the end of the month).
3. Markets Don’t Cause Losses, Investors Do. It is true that market fluctuations cause asset prices to vary – sometimes quite a bit. Yet the market (as a whole) does not cause losses. Volatility is part of its nature, always has been and always will be. Market losses come from investor behavior. It comes from investor’s bailing on sound strategies because they can’t stop looking or turn away from the financial pornography. We have two choices as investors: we can choose to appease our emotions or we can make money. It is that straightforward.
A Final Wrap
For many years the concept of behavioral finance has been learned by advisors. The power of behavioral finance is not in identifying terms nor behavior, it is in the regular application of these principles in your practice. From helping clients to think better about investing to using it to grow your business. It requires consistent use and proper framing or it could be detrimental by sounding eliteist or making your client feel stupid.
In one week, members of The Behavioral Finance Network will get a short video that they can use (or brand/record themselves) that elaborates on a very simple, yet powerful behavioral principle that should help investors maintain proper perspective among volatility. “Simple, But Not Easy” You too can use this if you join the Network. There are only 90 spots available. Join Today.