Mistake: Getting too caught up in current market conditions.
Method: Explain that economic and market cycles fluctuate, and appeal to the client's rational side.
Nicolas Grady sometimes wishes his clients would ignore financial news.
"People always overreact," says the advisor with Assante Capital Management in Dartmouth, NS. They fixate on current market conditions, which are often inconsequential if they're investing for the long term and their overall investment strategies are sound.
To curtail overreaction, explain there are both calm and volatile times during any sustained investment period. Here's how.
1. Reiterate comfort levels
Every time the temperature moves a degree or two, we don't fiddle with our thermostats. That's because we set them to temperatures at which we're comfortable. Further, our homes are well-insulated, so we don't notice small weather changes while we're indoors.
Grady uses this analogy to show clients that investments are similarly well-protected. Reacting to every market hiccup is just as unnecessary as tinkering with thermostats.
"If a portfolio is designed, balanced and managed properly, and the investment policy relates to the client's objectives, then doing nothing is probably your best course of action," he says.
To show clients their investments will work within long-term market cycles, Grady regularly rebalances to keep risk levels consistent.
2. Focus on System 2
When people see rattlesnakes, their heart rates go up and eyes dilate. The same thing can happen when they see pictures of the reptile—emotion kicks in before reason.
"That's the battle advisors face," says Chet Brothers of Brothers & Company Financial in Regina: People react viscerally to frightening news.
To calm jittery clients, Brothers looks to economist Daniel Kahneman, who classifies human thinking into System 1 (fast, intuitive and emotional) and System 2 (slower, deliberate and logical). When clients are in System 1 mode (worried about the current market), he helps them switch to System 2.
Doing that requires reviewing their time horizons and the fundamentals of their portfolios.
"I try to get them back to being rational," says Brothers, explaining, "What happened during the few hours of trading today is meaningless. When people get that, they think slowly again, and feel good when they leave.
"But I know we'll have to repeat this lesson."
3. Don't panic
Clients can make requests that jeopardize their long-term strategies. Be careful about acquiescing. It's easy to say, "Why don't we buy some GICs to smooth the anxiety you have about equities."
If advisors do that, notes Grady, "We're no better than clients who get caught up in current market conditions."
Still, explore the root causes. "They may be worried for a reason," says Daniel Wong, associate portfolio manager at Connor, Clark & Lunn Private Capital, Vancouver. "Heightened anxiety could be a manifestation of a change in another area of their lives—the time horizon to retirement may have suddenly shortened, or they're no longer receiving the work bonus they had counted on."
So ask: Is a client really anxious about Europe or RIM stock, or have his circumstances and goals changed? If it's the latter, assess whether their current investment strategies are still appropriate.