Life doesn’t come with a roadmap. That lesson has certainly been underscored by the global pandemic. Everyday life has changed for all of us, and change can be unsettling. Change can be especially difficult when it comes with ongoing uncertainty and monetary losses, even if they are on paper. In times like these, it is critically important for advisors to help clients stay grounded, keep current events in perspective and remember that headlines shouldn’t drive portfolio decisions. Investment returns never follow a straight path, but investors who focus on the downturns may lose sight of the upturns.
Volatility tests investors’ resilience Volatility can test the resolve of the most steadfast investors. Even when markets are operating smoothly and the economy is robust, downside risk can stoke investor anxiety. This is evident from research we conducted in late 20191 that examined investor mindset:
Only 36% of investors overall “feel they’re prepared if the markets took a downturn and the value of their investments declined.” That figure is roughly the same for both Baby Boomers (35%) and the Silent Generation (42%).
“Top five financial concerns” for investors overall are the rising costs of healthcare, that the value of investments will decline, protecting current level of wealth, the rate of return in the stock market and rising inflation.
Only 29% of investors use their financial advisor as “encouragement to help me stay on track due to market volatility.” Silent Gen (43%) is most likely to do so, then Baby Boomers (28%), Gen X (30%) and Millennials (21%).
Advisors can be instrumental in helping investors stay focused on their true purpose for investing—to think about what it means to be resilient and to realize that they are probably more resilient than they thought they were. What does it mean to be truly resilient? According to the American Psychological Association, resilience is the process of “adapting well in the face of adversity, trauma, tragedy, threats or significant sources of stress.” It gives us the ability to pull through difficult times and even achieve personal growth.2
We all have the capacity to be resilient. According to psychologist Meg Jay, “Resilience is not a trait. It’s not something you’re born with. It’s not something you just have.”3 This is good news: Through experience and self-reflection, we can develop resilience—both in life and in investing.
Balance emotion and logic to enhance decision-making The advisory community is in a unique position to help. Periods of extreme market stress can amplify the value of advice, not only through the benefits of holding a well-constructed portfolio but also in providing the structure and guidance to help make difficult choices. We must step up and provide the guidance that investors need to remain resilient in stressed markets.
Advisors can help investors navigate these unprecedented and tumultuous times by acknowledging the emotional component of decision-making. Empathizing with investors’ emotions likely promotes more productive conversations that can lead to healthier decision-making.
Behavioral economics can inform the tactics that advisors can use to help clients balance their IQ (objective reasoning) with their EQ (emotional responses):
Maintain perspective: Loss aversion is a cognitive bias that can impact decision-making. Finding purpose in the choice and connecting that to the client’s financial life—the intersection between the things that matter and the things we can control—reinforces thoughtful decision-making.
Add guardrails: Risk is not just volatility. For clients focused on negative anchors, provide a structured process that focuses on making a decision with the information at hand. Staying on track and experiencing the positive aspects of making prudent decisions is a powerful incentive.
Align with goals: When channeled properly, emotion can be a force for action. But when volatility is high, availability bias can distort the investor’s perception and lead to decisions that run counter to long-term goals. Look for opportunities to tailor investment solutions to personal circumstances and align emotional constructs (such as family, security and independence). The investor’s life goals are the ultimate benchmark and should continue to fuel motivation and ground portfolio choices.
Fostering resilience Even though we know that market downturns are inevitable, most of us still need reminders that portfolios are not expected to climb incessantly. In the days ahead, we will be reminded not only that market downturns are inevitable, but of how the balance—of our portfolios and our lives—can so quickly and radically be altered. In this environment, advisors can help seasoned investors look to their experience in weathering past storms and coach new investors on sticking to the path toward long-term goals. Across all stages of the market cycle, this may be the most valuable financial advice.
1 State Street Global Advisors Individual Investors 2019 Study. A global survey on consumer sentiment, purpose and behavior in wealth management. 2 American Psychological Association, “Building your resilience.” February 1, 2020. Accessed at https://www.apa.org/topics/resilience. 3 Meg Jay, PhD, “8 tips to help you become more resilient.“ Ideas.ted.com, January 5, 2018. Accessed at https://ideas.ted.com/8-tips-to-help-you-become-more-resilient/.
The whole or any part of this work may not be reproduced, copied or transmitted or any of its contents disclosed to third parties without SSGA’s express written consent.
The views expressed in this material are the views of the State Street Global Advisors Practice Management Group through the period ended March 24, 2020 and are subject to change based on market and other conditions. The opinions expressed may differ from those with different investment philosophies. The information provided does not constitute investment advice and it should not be relied on as such. It does not take into account any investor's particular investment objectives, strategies, tax status or investment horizon.
This document contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.
Investing involves risk including the risk of loss of principal.
ETFs trade like stocks, are subject to investment risk, fluctuate in market value and may trade at prices above or below the ETFs net asset value. Brokerage commissions and ETF expenses will reduce returns.
Standard & Poor's®, S&P® and SPDR® are registered trademarks of Standard & Poor's Financial Services LLC (S&P); Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC (Dow Jones); and these trademarks have been licensed for use by S&P Dow Jones Indices LLC (SPDJI) and sublicensed for certain purposes by State Street Corporation. State Street Corporation's financial products are not sponsored, endorsed, sold or promoted by SPDJI, Dow Jones, S&P, their respective affiliates and third party licensors and none of such parties make any representation regarding the advisability of investing in such product(s) nor do they have any liability in relation thereto, including for any errors, omissions, or interruptions of any index.
Distributor: State Street Global Advisors Funds Distributors, LLC, member FINRA, SIPC, an indirect wholly owned subsidiary of State Street Corporation. References to State Street may include State Street Corporation and its affiliates. Certain State Street affiliates provide services and receive fees from the SPDR ETFs. ALPS Distributors, Inc., member FINRA, is the distributor for DIA, MDY and SPY, all unit investment trusts. ALPS Portfolio Solutions Distributor, Inc., member FINRA, is the distributor for Select Sector SPDRs. ALPS Distributors, Inc. and ALPS Portfolio Solutions Distributor, Inc. are not affiliated with State Street Global Advisors Funds Distributors, LLC.
THIS SITE IS INTENDED FOR QUALIFIED INVESTORS ONLY.
No Offer/Local Restrictions
Nothing contained in or on the Site should be construed as a solicitation of an offer to buy or offer, or recommendation, to acquire or dispose of any security, commodity, investment or to engage in any other transaction. SSGA Intermediary Business offers a number of products and services designed specifically for various categories of investors. Not all products will be available to all investors. The information provided on the Site is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation.
All persons and entities accessing the Site do so on their own initiative and are responsible for compliance with applicable local laws and regulations. The Site is not directed to any person in any jurisdiction where the publication or availability of the Site is prohibited, by reason of that person's nationality, residence or otherwise. Persons under these restrictions must not access the Site.
Information for Non-U.S. Investors:
The products and services described on this web site are intended to be made available only to persons in the United States or as otherwise qualified and permissible under local law. The information on this web site is only for such persons. Nothing on this web site shall be considered a solicitation to buy or an offer to sell a security to any person in any jurisdiction where such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction.
Before investing, consider the funds' investment objectives, risks, charges and expenses. To obtain a prospectus or summary prospectus which contains this and other information, call 1-866-787-2257, download a prospectus or summary prospectus now, or talk to your financial advisor. Read it carefully before investing.
Not FDIC Insured * No Bank Guarantee * May Lose Value