Help clients keep perspective through negativity
19 May 2020 | Practice Management
By Amanda Levis, PhD, Center for Analytics & Innovation (CAI)*, Advanced Experimentation Team.
When financial markets take a turn for the worst, the media is flooded with doom and gloom stories, which can be overwhelming for investors, particularly when portfolios have already taken a hit. Although research has shown that a spike in negative news can lead to increased withdrawals during market 1, we suggest that investors tune out the negative news and stay the course.
The influence of negative news on financial decision-making is more concerning given that research has shown we are not particularly good at distinguishing between factual, objective news and subjective commentary and analysis2.
Even if clients are only exposed to objective news, the sheer volume of news digested can influence their beliefs about markets. Research by Nobel Prize-winning psychologist and author Daniel Kahneman found that perceptions of risk are driven in part by the ease of imagining potential outcomes3, while the emotions that these outcomes provoke also play a role in distorting our perception of risk4.
Effectively, this means a spike in negative financial news can lead clients to think more about worst-case scenarios, making the market feel riskier than it normally would or without exposure to the 24/7 news cycle.
Advisers can help clients stay grounded and maintain a balanced perspective through the storm in a number of ways, which we have outlined below.
Seek balance in information
Everyone has their own biases and preferences when it comes to where we get our information from, but these are difficult to acknowledge and mitigate when it comes to ourselves, something known as ‘bias blindspot’5.
One way to help a client overcome their biases is to urge them to be wary of opinion pieces that make bold, definitive claims without offering an opposing argument.
Seek balance of thought
When your clients get off of the phone with you, the amount of time they spend thinking about various market outcomes does not necessarily reflect the likelihood of these outcomes, but it can affect their perception of risk. Encourage your clients to balance the time they spend thinking about worst-case scenarios by purposefully thinking about positive market outcomes.
Avoid over-personalising negative information
There is a danger that clients overestimate the significance of negative news to their personal finances. To help avoid an over-personalisation of bad news, it might help to remind them that multiple factors determine the extent to which a change in the market will translate to a change in their own life. Remember to clarify that even a “failed outcome” might not be an objectively bad outcome: failure to meet a pre-specified goal does not necessarily translate to lower quality of life.
Inevitably, an avalanche of negative news accompanies market downturns and this is likely to influence a client’s market beliefs and perceptions of risk. Clients are exposed to myriad sources of information, with the objective and subjective sometimes hard to differentiate. Giving a nudge on the importance of seeking balance might be all that is needed to moderate the influence of negative news on important financial decisions, especially during market downturns.
*The Center for Analytics and Insights (CAI) supports Vanguard’s analytics and research needs. The CAI produces advanced analytics ideas and solutions, performs and synthesizes market and usability research, and promotes analytics enablement across the enterprise.
1 Tetlock, 2007
2 Osman et al., 2010
3 Kahneman et al., 1982; Slovic et al., 2013
4 Fischhoff et al., 1978; Loewenstein et al., 2001
5 Pronin et al., 2002; West et al., 2012
Investment risk information:
The value of investments, and the income from them, may fall or rise and investors may get back less than they invested.
This document is directed at professional investors and should not be distributed to, or relied upon by retail investors.
This document is published by Vanguard Asset Management, Limited, based on research conducted by Vanguard Group Inc. It is for educational purposes only and is not a recommendation or solicitation to buy or sell investments. It should be noted that it is written in the context of the US market and contains data and analysis specific to the US.
The material contained in this document is not to be regarded as an offer to buy or sell or the solicitation of any offer to buy or sell securities in any jurisdiction where such an offer or solicitation is against the law, or to anyone to whom it is unlawful to make such an offer or solicitation, or if the person making the offer or solicitation is not qualified to do so. The information in this document does not constitute legal, tax, or investment advice. You must not, therefore, rely on the content of this document when making any investment decisions.
The opinions expressed in this article are those of individual speakers and may not be representative of Vanguard Asset Management, Limited.
Issued by Vanguard Asset Management, Limited which is authorised and regulated in the UK by the Financial Conduct Authority. Issued by Vanguard Investments Switzerland GmbH.
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© 2020 Vanguard Investments Switzerland GmbH. All rights reserved.