Market volatility is a stressful reality for any investor. But when market turbulence strikes, financial advisors are in a unique position to help their clients anticipate and manage their anxiety around money. All it takes is understanding a little psychology.
And while it’s true that stock markets have improved since the recession in 2008, surveys show that investors and financial advisors still expect volatility to return throughout the next few cycles.
In fact, according to the Eaton Vance Spring 2019 ATOMIX survey, financial advisors consider managing their clients’ relationship to volatility to be one of their major concerns this year.
So what is an advisor to do? To better understand how a client might react to a volatile trend, it might help to think about their deep-rooted feelings about money and how they view their personal control of events.
Research shows that the wealthiest investors — those who make up the richest “one percent” — have a different relationship to investments than the less wealthy: They have what’s known as a heightened internal locus of control.
For the most part, humans either think that they’re in charge of what happens in their life, or they believe that life happens to them (those who believe they’re in control of their life and its outcomes have an internal locus of control).
Having an internal locus of control is associated with higher wealth, and because these people are more likely to take responsibility for the outcomes in their life, the top one-percenters are also more likely to believe in their own abilities to solve problems and achieve goals, make better investment decisions and react more calmly when volatility strikes.
Having an external locus, however, is associated with self-destructive financial behaviors.
Financial advisors can help clients move to a more centered approach by asking thoughtful questions about past financial decisions, and can assist in determining where a client’s locus of control lies.
Dr. Brad T. Klontz, an associate professor of practice in financial psychology at Creighton University Heider College of Business and the cofounder of the Financial Psychology Institute, uses what he calls “money scripts” to help understand investor behavior.
Money scripts are unconscious beliefs about money, which are developed in childhood, and drive financial behaviors as adults. Klontz considers there to be four groups: money avoidance, money status, money worship and money vigilance — and the first three are associated with lower levels of net worth, lower income and higher amounts of revolving credit.
Klontz offers questions that you can ask to determine a client’s unique script makeup.
What’s also encouraging is that, while volatility can be stressful for any investor, recent research shows that volatility can indeed lead to increased adaptability. Yale researchers found that primate brains are more actively learning when a situation is unpredictable than when the situation is easier to predict. This suggests that our brains become more engaged when facing a high-risk-high-return situation, because this is when we absorb new information and adapt for future outcomes with preferred results.
Watch our video above to see how you can leverage your clients’ psychological background to inform and build an investment strategy to help meet their goals.
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Source: Financial Advisors: Here’s How Market Volatility Impacts Investor Psychology