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Calm in the storm: How advisers can combat emotional investing

Amid global market volatility, it's easy for investors to fall into the trap of making long-term decisions based on momentary emotions such as fear or greed

May 21, 2019 @ 4:19 pm

By Colby Payne and Molly Weiss

In today's society, news breaks on a 24/7, nonstop cycle and the stock market can shift at the drop of a hat. Now that everyone has unlimited access to news at their fingertips, people can find out what's happening around the world in a matter of seconds.

Amid global market volatility, it's easy for investors to fall into the trap of emotional investing, making long-term decisions based on momentary emotions such as fear or greed.

When tensions run high, advisers must keep calm and help clients navigate through the rough waters. With the appropriate tools and technologies, financial advisers can help customers shy away from irrational, impulsive decision-making and inform strategic investments that are rooted in data and insights. Here are three ways advisers can help combat emotional investing:

1. Financial planning

Failing to plan is planning to fail. Financial planning allows people to examine their current financial state, identify where they want to be, set short- and long-term goals, and prioritize the tactics used to achieve those goals. It's important to work with your clients to set goals — and ensure that they understand the process and have realistic expectations for achieving goals will help them cope with short-term volatility. When the market ebbs and flows and client emotions are unpredictable, a thoughtful financial plan serves as the foundation for all financial decisions. This plan is also a helpful reference point to look back on as a North Star of all investment decisions.

(More: Helping clients overcome emotional biases)

2. Investor education

Knowledge is power. When investors are stressed about market volatility and are prone to making hasty decisions, advisers should take this as a learning opportunity to educate their clients. It's important for investors to be well-equipped with the latest market trends, and advisers with access to data-driven insights will be an invaluable resource in ensuring that clients are making informed, strategic decisions. Reaching your clients with curated, factual content is a natural tension reliever when emotions might be running high.

(More: Solidify client relationships in volatile times by overcommunicating)

3. Leverage financial technology

A recent study by Cerulli Associates found that 75% of financial advisers feel they could get greater leverage from the technology tools at their disposal. Financial technology can be instrumental in streamlining efficiencies, analyzing client data, identifying potential risks and ultimately, producing better outcomes for clients. Particularly during times of high emotional stress, technology can help advisers reach clients with real-time updates, insightful information and educational content to mitigate potential irrational investment decisions.

(More: Communicating with clients in tough times)

Bottom line

In high-stakes situations in which investors are falling prey to poor investment choices as a result offear or greed, advisers can be the calm in the storm. While they can't control their clients' emotions, they can help combat emotional investing through financial planning and investor education.

Advisers also need to leverage the financial technology tools at their disposal to better serve their clients and help them produce better outcomes. With humans and machines working hand-in-hand, advisers will be well-equipped to help their clients make strategic investment decisions.

Colby Payne is vice president of product management at Envestnet | Yodlee and Molly Weiss is senior vice president of product management at Envestnet.

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