It’s Not You, It’s Your Portfolio: Managing Investor Emotions
Al Barbaro is Senior Vice President and Managing Director of the Natixis Global Asset Management Durable Portfolio Construction® Research Center. The Center is home to a research initiative that monitors the attitudes and perceptions of individual investors, financial advisors, and institutional decision makers worldwide. By putting data at the center of the conversation, we look to help advisors and their clients be better informed as they work to build optimal portfolios.
A central focus of the Research Center’s work is to better understand how and why emotions and emotional decision-making can effect investor decisions. I recently caught up with Al to discuss this topic in detail.
We all know that investing involves considerations of risks with potential rewards. How does emotional decision-making on the part of investors influence the work of advisors?
The effect of emotional decision making is more significant than you might expect. Our research shows that worldwide, advisors see emotional decisions by their clients as a major threat to their business.1 Eighty-three percent of advisors say that preventing clients from making emotional investment decisions is important to their business decisions.1
What can advisors do to help mitigate the tendency of clients to act emotionally when it comes to managing their investments?
Advisors play a big role here – it’s an opportunity. In my view it’s one of their most important responsibilities to their clients. I think it’s about meeting client needs directly and in a way that instills more confidence about their financial goals and their portfolio. The Research Center polls investors all over the world, but in the U.S. we’ve found that investors are looking to their FAs for a few key things. They want help making more informed investment decisions, they want better solutions for managing risk, and they want help setting their investment goals and their financial plans.2 I believe that FAs who provide guidance in these areas are less likely to receive highly emotional phone calls from clients during periods of greater market volatility.
What data has the Durable Portfolio Construction® Research Center compiled on volatility and how it’s viewed by individual investors?
More than two-thirds of the investors we’ve surveyed report feeling helpless about trying to protect their portfolio in volatile times. That’s a big number – and feeling helpless is no joke. Now the number of investors feeling this way may have to do with recent upticks in volatility.3 But I think it may also reflect another surprising data point from our work – that over three in four investors are making decisions based on gut instincts alone.4 Markets are always unpredictable, right? So if you’re relying on intuition alone — you’ve got a big reason to be uncomfortable.
Those are surprising numbers. It seems like there are a lot of investors who are out in the cold – without a coat or umbrella, so to speak?
That’s exactly right. They aren’t as prepared as they could be in terms of managing risk and planning for the long-term. In fact, we also see from our research that 51% of investors don’t have financial goals established and 63% don’t have a financial plan – without these cornerstones in place many investors may find it difficult to navigate the market.2
Some advisors who read this may have clients or prospective clients who they would describe as ill-prepared. In addition to their investment knowledge – how can advisors offer to help?
For me, it’s a simple answer – Durable Portfolio Construction®.5 This is an approach that’s unique to our industry because it’s objective – let’s talk about your goals and your risk tolerance first. From there, the conversation can become more about things like diversification, alternative strategies, et cetera. We believe that the most effective FAs are likely to be the ones who bring insight and know-how to their clients. Of course, investment strategies and investment experience are important, but it’s risk-mindedness that can improve confidence and can help clients from becoming too reactive about the latest market headlines. It’s about helping FAs fully prepare their clients for any and all market conditions and getting clients focused on the long-term.
Thanks Al. I appreciate you taking the time. Where can advisors learn more about the Research Center and Durable Portfolio Construction®?
You’re welcome. All of our most recent work – including whitepapers and videos – is always available at durableportfolios.com.
Al Barbaro is Managing Director and Senior Vice President of the Durable Portfolio Construction Research Center. In this role, he collaborates with the Durable Portfolio Construction Research Center team to bring the outputs of the Center into the field and make them actionable with advisors. Mr. Barbaro has been with Natixis for over a decade, previously serving as a Managing Regional Director in the Gulf Coast territory. He has over 20 years of asset management sales experience. Mr. Barbaro holds a BSBA in finance from Suffolk University. He is FINRA Series 7 and 63 licensed.
1 Natixis Global Asset Management, Global Survey of Financial Advisors conducted by CoreData Research, July 2015. Survey included 2,400 financial advisors in 14 countries and territories.
2 Natixis Global Asset Management, Global Survey of Individual Investors conducted by CoreData Research, February-March 2016. Survey included 7,100 investors from 22 countries.
3 Number of days S&P went up or down 1% or more – 2014: 38, 2015: 73, 2016 (as of 8/15/16): 40. Source: Morningstar
4 Natixis Global Asset Management Global Individual Investor Survey conducted by CoreData Research (February 2015). Survey included 7,000 investors in 17 countries.
5 Durable Portfolio Construction does not guarantee a profit or protect against a loss.
This material is provided for informational purposes only and should not be construed as investment advice. The views and opinions expressed above may change based on market and other conditions. There can be no assurance that developments will transpire as forecasted.
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