How good financial advice can lead to good investor behaviour
Whenever market volatility rises, the benefits of treating a good financial adviser as an investor’s behavioural coach are truly highlighted.
Higher share-market volatility – whether prices are rising or falling – can tempt an investor to make emotionally-driven investment decisions that are often damaging to their portfolios.
Fortunately, a good financial adviser acting as an investor’s behavioural coach or guide can help keep potentially wealth-destructive traits in check.
A recently-published research paper, The Vanguard adviser’s alpha guide to proactive behavioural coaching, revisits the contributions that a good adviser can make as an investor’s behavioural coach – a long-favoured topic of Smart Investing.
As the paper’s author, senior investment analyst Donald Bennyhoff, writes: “Investing is an emotionally-charged effort that challenges people to contend with uncertainty and doubt”.
Behavioural coaching from an investment perspective has been defined as encouraging investors to change elements of their behaviour that would otherwise prevent them from achieving their goals.
As behavioural coaches, good advisers may warn investors about such damaging behavioural traits as over-confidence, inertia (getting in the way of saving), panicking when markets are falling, becoming greedy when markets are rising, and dwelling excessively on past losses.
A good adviser acting as a behavioural coach can:
Reinforce how a financial plan modifies an investor’s behaviour: Bennyhoff describes a written financial plan as “the foundation of behavioural coaching” for investors. It should take into account investors’ short and long-term goals, their tolerance to risk, and such other factors as their tax positions. More generally, Bennyhoff emphasises that a written plan helps ensure that investors “understand that investing requires them to intentionally bear risk while seeking rewards”. It provides a backbone for investment decisions and, in turn, discourages emotional decisions.
Remind investors to keep up their wealth-creating habits: This includes reminding investors to regularly rebalance their portfolios back to their strategic or target allocations. And advisers can keep reminding investors about the rewards of such investment fundamentals as long-term compounding (as returns are earned on past returns as well as invested capital), trying to save more, minimising investment costs and personal budgeting. These reminders are particularly valuable during times of higher market volatility and uncertainty.
Think about whether you can take more advantage of an adviser’s skills in ways that have nothing to do with trying to beat the markets – including acting as a behavioural coach and a personal wealth manager.
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Written by Robin Bowerman, Head of Corporate Affairs at Vanguard.
Reproduced with permission of Vanguard Investments Australia Ltd
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