The Bipolar Investor in All of Us

In the financial markets, either the sky is falling or we are living in a new golden age. At least that’s the way it can seem when your money is on the line and emotions are running high.

When the market collapses and leading economists are on CNBC telling you that capitalism itself has died, you feel like a dazed boxer who just wants to end the fight. Sometimes we just want to call our adviser and sell everything, at any price, to end the pain.

When the S&P 500 is up 200% in a 6-year bull market and when volatility is at historical lows, the market may feel unstoppable. You call your adviser, “Put me in 100% equities.” This kind of all-or-nothing emotional behavior can be downright catastrophic in the market.  Unfortunately, without knowledge of how our emotions impact our investing, these natural urges can be difficult to resist.

The bipolar investor in all of us has two completely different personas that standard “risk tolerance questionnaires” won’t capture.  These well-meaning interrogations have a glaring deficiency: they are merely a snapshot of the investor’s frame of mind at a particular moment in time. If you gave the same investor a risk tolerance questionnaire in February 2009 and again in March 2015, you might assume your secretary made a filing error. Surely, these responses cannot be from the same person; that risk-averse investor has transformed into a raging bull.

How can you predict how your client will react in a devastating bear market? The short answer is you can’t – at least not with complete accuracy. Even financial advisers are not immune to the bear market blues. One study found that 93% of advisers experienced symptoms of post-traumatic stress disorder during the 2008 crash. If the professionals were shell-shocked, just imagine how the clients felt.

In a bull market, you have the opposite problem. No one wants to rebalance when their equity allocation keeps growing every week.

One thing advisers can do is to help clients understand their emotional tendencies before markets approach extreme levels.  

This starts with the risk tolerance questionnaire:  Do not assume a risk-seeking client is going to be so cavalier when the market corrects substantially. If you give your clients questionnaires during a bull market, question their responses. Ask them if that’s how they really feel. Walk through different scenarios with them. Re-deploy the questionnaire at different times in the market cycle.

In an ideal world, every client is informed and has realistic expectations.  They understand the balance between risk and return.  If clients are not aware of these concepts, it’s the adviser’s job to subsequently raise awareness.

Warren Buffett said, “What we learn from history is that people don’t learn from history.”

How can you help your clients from becoming one of those people? One way is to provide them with informative, engaging content that talks about financial realities in language that makes sense to them.

Be careful with technical talk.  Discussing terms like alpha, beta and Modern Portfolio Theory can be informative for some, but may be a turn off for others. According to Allianz, “The vast majority of women find most financial information hard to understand, dull, and boring.” Start with the basics, like risk management and diversification. If you begin the conversation with what the client is familiar with, it will make them much more open to additional concepts later on.

A financial adviser must be an advocate. They must provide educational opportunities so the clients can stay on track during difficult market times.  They also must provide a sense of balance to those bipolar tendencies that come out during market excesses.  By being proactive, advisors may be able to avoid those conversations entirely and instead focus on helping the client reach their financial goals.

By maintaining close contact and providing education through various mediums, you can assure your clients that you are committed to their success.

Learn how Wavelength’s unique digital learning tools can be employed by financial services firms to effectively educate clients on critical topics.