Better management of investor anxiety during periods of volatility is essential to helping clients maximise the potential of their investments, delegates at the Personal Finance Society (PFS) heard.
Barclays behavioural finance expert Peter Brooks said advisers should use behaviour economic theory in practice with clients to help them manage the ‘human element' of investing.
He said moving clients away from optimal investment models could be part of that strategy, even if it is just a short term measure to alleviate anxiety or stress during times of turbulence.
"Education and knowledge are not enough to manage emotional anxiety. Clients want anxiety-adjusted returns. Diversification is not enough, that does not take the human element into account the best returns will minimise anxiety," he warned.
Brooks said the use of an investment framework with clients can provide protection and show tangible actions to deal with anxiety. He also said many investors suffer from "action bias", meaning they feel the need to do something when investments go down.
Brooks said advisers can help clients manage the situation not by changing the overall investment strategy - which they may feel like doing - but by talking them through the situation, potentially making short term changes or asset allocation tweaks to show them they are fully involved and "doing something".
"That can be a great comfort," he added.
Brooks said pensions were "quite well behaviourally designed" as people cannot access their money when markets fall and because statements tended to be low frequency.
He said it was almost impossible to stop clients monitoring their investments on a daily basis if they want to but urged advisers to limit the amount of statements they send clients.
Brooks used data to show holding an investment for 12 years was highly likely to get return in double digits. But the period of greatest "investment anxiety" was during the first two years, during which time it was likely selling out would result in losses.
He said getting over that period of stress was the key to investment success and using behavioural economic theory can help overcome the issue.
"Better educated clients make better decisions, that is an absolute given. But trying to educate someone during periods of stress if very difficult."
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