When Your Client Needs to Be More Aggressive But Won’t

It is not uncommon for advisors to have situations in which an investor needs to be more aggressive (hold more stocks), but refuses to do so. Sometimes this may occur because the investor is too conservative to reach their goals and other times it is because they went to cash at some point and don’t want to face the risk of future (temporary) market losses. Either way, what is an advisor to do in these cases to help the investor?

A special shout out to Geoff Luchetta, who is an advisor with Eagle Strategies, for suggesting this topic. Thank you Geoff! And if any of you have topics, questions, or ideas you would like me to write on, please email me.

Too Conservative to Reach Their Goals

One function of financial planning is for investors to define their financial goals, and for advisors to recommend an investment strategy to help them achieve those goals. For example, we may find that an investor needs a portfolio that will average an 8% annual return to reach their goals. But what if the suggested portfolio holds more stocks (too much possible downside) than the investor is comfortable with? What do we do?

In this case, rather than tackle the aversion to volatility head on, advisors could suggest an alternative. That is increase their savings rate. Investing is about tradeoffs. If they don’t want the volatility, then they can increase their savings rate. If they don’t want to increase the savings rate and refuse to accept volatility, then they need to reduce their goals. If they do none of that, then they are living in an illusion and must be told that.

Dealing with Investor Fear

Fear drives the majority of investor decisions to stay out of the market or be more conservative than they should. Fear of (temporary) losses is real and affects many investors – some more than others. Fear is an emotion, and therefore cannot be solved with logic or reason. It is important to understand that feelings trump logic and reason. So how do we deal with fear? You can’t tell someone to not feel a certain way. You can try, but odds are high you won’t be successful and will probably upset the person.

Loss aversion is at play here. The discomfort and uncertainty from possibly experiencing losses drives the decision. One of the best ways to combat this is to make the discomfort and uncertainty from their “plan” greater than the natural discomfort and uncertainty from investing in stocks. This can be accomplished by making a few truthful statements such as, “I don’t know which way the next 25% move in the market will go, but I know where the next 100% move will go” and “You do realize that after taxes you are not keeping pace with inflation. While it may feel good now, you are ensuring the deterioration of your future purchasing power.”

It can be highly effective to compliment investment truths with good questions and practicing prospective hindsight. In 15 years, how would you feel to look back and see the stock market having doubled in value while you remained at nearly the same value? At what point do you realize the train has left the station and you are not on board? What will you do when you are 80 and your account value only buys you half of what it does today? Such reflective questions can help them become very uncomfortable. They may then choose the less uncomfortable strategy of a diversified investment portfolio…which is what we are going for.

And if That Doesn’t Work? A Real-Time Application

I recently met with a wealthy investor who made many wonderful financial decisions over the years. He has been financially astute and has a solid head on his shoulders. Except for one thing. He took his retirement accounts and went to CD’s during the CoronaCrash and has remained there since. He shared some pride in the 5.5% interest he is getting, until I told him that after tax he is not keeping pace with inflation and is guaranteeing the loss of purchasing power. That truth hit him, and then we started talking about the market.

He said he never saw dollar losses so big and that scared him so he went to cash. But then the market went up and up and up (the train left the station and he wasn’t on board). Now he doesn’t want to get in because markets are at all time highs. At which point I asked him when he would get in since no one knows where the market is going, and it could keep going up. There was discomfort on the part of the investor. He clearly is fearful of going into the market and seeing it instantly drop 20% (almost all investors are afraid of this scenario). But he also recognized something needs to be done. But how to reconcile the two?

At that time, I introduced a few strategies that would provide him the upside to beat inflation and grow his assets, but also a level of protection that would make him comfortable making the jump. There are many investment products out there. I was upfront – they have a greater cost (either in explicit fees or implicit fees by capping an upside). But that cost is to transfer the downside risk to another party, and it would be worth it if that’s what it takes to get him in the market, and to stay this time. One word of caution. Many investors may say they have learned their lesson. But they are likely underestimating the power of emotion and fear when things are gloomy. The best predictor of future behavior is past behavior.

While some biases and poor investment decisions can be helped through logic and reason (cognitive biases), emotional biases are best solved in the portfolio recommendation, which includes various strategies we employ to help the investor make the best decision for his/her future…despite how they may feel.


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