In highly uncertain investment markets like those we’re experiencing right now, client fear can often override logic – but advisers have a unique opportunity to help clients manage such anxiety and maintain a long-term perspective. In her latest article for IFA Magazine below, Linda Johnstone (pictured), Head of Investment Proposition, Novia Global, explores how advisers can recognise the signs, understand the roots, and ultimately guide clients through emotional turbulence toward better financial decisions and outcomes. And don’t worry – there’s not one single mention of tariffs!!
Recent events have reminded us all that in the face of extreme uncertainty, far more often than not, markets react badly. We have all also been reminded that the response of many investors, in turn, is one of confusion and fear.
It is at times like these that we need to understand investor anxiety. Advisers are essentially powerless when it comes to many of the personal dynamics that shape investment decisions, but this is one where there is actually scope to make a significant difference.
We first ought to note that various studies have shown how the degree to which someone invests over a lifetime can be influenced by a range of factors – some more likely to encourage market participation, others more likely to deter it. Positive determinants might include an individual’s age, education and social group, while their negative counterparts might include religion, income, marital status and – yes – anxiety.
Advisers cannot bestow immortality, wisdom or standing. Nor can they serve as spiritual guides, HR experts or relationship counsellors. But they can help clients develop a more rational view of the ups and downs that every financial journey entails.
The principal reason why anxiety is a hurdle to achieving good outcomes is that many investors do not fully grasp what it really represents. They do not comprehend how it undermines their thinking or why it is probably unwarranted in the first place.
Here are five points that can frame the issue more clearly. They might not be able to prevent tariff-related tumult, but they could play a role in keeping investors focused on the bigger picture and the longer term.
1. Anxiety and risk aversion are not alike
Risk-profiling tools are nowadays routinely used to gauge attitudes to investing. Yet even the most cutting-edge of them cannot fully capture the potentially ruinous impacts of anxiety.
This is because risk aversion is a rational construct. It stems from a reasoned desire to tolerate a degree of risk appropriate for an investor’s unique goals. This means it is comparatively easy to assess and measure.
Anxiety, on the other hand, is completely irrational. It is rooted in a dread of the unknown – or, more accurately, what appears to be unknown. Like any emotion, it does not lend itself to optimum decision-making.
2. Anxiety usually proves temporary
Anxiety can be devastating, but the fact is that it very seldom lasts. In the investment arena, as in any walk of life, we tend to learn to live with things.
By way of illustration, imagine that you buy a new car and then scrape one of its wheels on a kerb within seconds of leaving the dealership forecourt. You may be furious for a while, but your anger will eventually subside and vanish.
This pattern of behaviour is worth remembering whenever circumstances seem to suggest exiting the market is a wonderful idea. Remaining calm and waiting for a brighter mood to emerge – as it almost invariably will – frequently turns out to be the most prudent course of action.
3. Anxiety can be mitigated by trust
Strong relationships between investors and their advisers can have many benefits. Reducing or even eliminating anxiety is one of them.
Expectation management is crucial in this regard. Advisers are more likely to earn their clients’ trust if they demonstrate a sense of realism – as opposed to portraying themselves as omniscient visionaries who miraculously possess all the answers.
Pretending to have some kind of uncanny notion of how the future will unfold can be especially counterproductive. Such “insight” will, after all, usually prove wrong. There is no merit in inviting disappointment and a loss of credibility.
4. Anxiety is a result of short-term thinking
“Time in the markets beats timing the markets” is a maxim with which we are all familiar. Yet many investors still struggle to accept that staying invested is usually the safest option in times of turmoil.
The sweep of investment history provides the most compelling lesson in this respect. Yes, there are numerous periods during which markets have plummeted – sometimes at an alarming pace and/or to a disconcerting extent – but their trajectory has always risen over time.
Investors who obsess over short-term twists and turns might never truly feel at ease. This is why it is vital to drive home the value of adopting a long-term outlook.
5. Anxiety is a product of misdirected focus
Investors who look hard enough are practically guaranteed to find something to fret about. During the past quarter-century alone we have experienced the bursting of the tech bubble, the global financial crisis and the COVID-19 pandemic – not to mention the current upheaval.
Yet holding firm throughout all this turbulence is likely to have reaped a handsome reward. Why?
Ultimately, the human race is pretty good at getting into trouble but better still at getting out of it again. This is thanks to ingenuity and innovation, which are far more deserving of investors’ focus than politics and other quotidian concerns that consistently grab headlines, furrow brows and shake confidence.
