Why Your Clients Won’t Make Investment Decisions Now And What To Do About It

Why Are Your Clients Investing?

Most of your clients are investing for the long-term. Their asset allocation may change with age, but a client should generally have at least a portion of their assets in the equity market for long-term growth. Yet, at this very moment, many of your clients feel so apprehensive over the upcoming election and its effect on their portfolios, they have frozen when it comes to making investment decisions. Or, worse, they are divesting in a panic. What can you do? Remind them of their investment goals and long-term financial plan.

Election Outcomes Don’t Matter to the Financial Markets

John Rekenthaler, Vice President of Research for Morningstar, writes in a recent column that market performance under any of the last ten presidents isn’t attributable to the president's “…party affiliation but instead the president’s timing.” In essence, if a bull market occurs under a president’s administration, that president is merely lucky. [1]

What Will the Market Do?

“What will the market do?,” a newsman asked of the great financier J.P. Morgan; "It will fluctuate,” he replied. [2] It will continue to fluctuate no matter who is elected. Our clients have given the upcoming election far more credit to move the market than is warranted. Many seem convinced that if their candidate is elected president, the equity market will skyrocket. If the other candidate is elected, the market will collapse. How can we be so certain? Because of a cognitive heuristic, known as confirmation bias. [3]

Metaphorically speaking, when it comes to news, most people prefer King Kong to Shirley Temple. Instead of seeking neutral opinions, many of us seek out news and opinions that tell us what we want to hear. A lot of people want someone they believe in telling them that Armageddon is approaching in the form of economic collapse, or a food shortage, or other unimagined horrors if the other side wins the election.

Let’s face it; human beings are entertained far more by stories of an impending apocalypse than listening to government scientists telling us to wear masks, wash our hands, and stay six feet apart. We should follow these procedures if only to protect others from ourselves since we easily could have undiagnosed coronavirus. The scientists are brilliant men and women but not nearly as entertaining as Godzilla.

Cognitive Science and Your Clients

Given the record-setting volatility in the stock market in recent months, clients predict the future of the market by looking at the recent past. “…investment-related anxiety is attributable to  “recency bias” — a cognitive heuristic in which we overestimate the significance of the most recent period in time.” [4]  An excellent way to work with clients who are exhibiting recency bias is to explain it to them.

Finally, our clients are dealing with another powerful cognitive bias known as loss avoidance. If our stocks perform poorly, we often feel stressed, anxious, depressed, even if are losses are only on paper. But if our stocks increase in value, we feel good, but that’s it. According to the Decision Lab, a behavioral science website, “…the pain of losing [something of value] is psychologically twice as powerful as the pleasure of gaining…” Simply put, it’s better not to lose $20 than to find $20.” [5]

Resources: 

[1] https://www.morningstar.com/articles/1000663/presidential-elections-dont-matter-for-investments

[2] https://www.quotes.net/quote/35198

[3] https://www.britannica.com/science/confirmation-bias

[4] https://www.psychologytoday.com/ca/blog/i-hear-you/201901/6-ways-real-investors-cope-serious-financial-anxiety

[5] https://thedecisionlab.com/biases/loss-aversion/

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