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.
Please contact us pn 07 5444 0675 if we can be of assistance .
Written by Robin Bowerman, Head of Corporate Affairs at Vanguard.
Reproduced with permission of Vanguard Investments Australia Ltd
Vanguard Investments Australia Ltd (ABN 72 072 881 086 / AFS Licence 227263) is the product issuer. We have not taken yours and your clients’ circumstances into account when preparing this material so it may not be applicable to the particular situation you are considering. You should consider your circumstances and our Product Disclosure Statement (PDS) or Prospectus before making any investment decision. You can access our PDS or Prospectus online or by calling us. This material was prepared in good faith and we accept no liability for any errors or omissions. Past performance is not an indication of future performance.
© 2019 Vanguard Investments Australia Ltd. All rights reserved.
Any information provided by the author detailed above is separate and external to our business and our Licensee. Neither our business, nor our Licensee take any responsibility for any action or any service provided by the author.
Any links have been provided with permission for information purposes only and will take you to external websites, which are not connected to our company in any way. Note: Our company does not endorse and is not responsible for the accuracy of the contents/information contained within the linked site(s) accessible from this page.