Kimberly Foss had an interesting article in Financial Planning Magazine entitled, “Markets Going Haywire? How to Beat Stress.” It compared the trauma rocky markets create for financial advisors with the post traumatic stress associated with survivors of violent events:
A study published last year in the Journal of Financial Therapy compared advisors’ symptoms to post-traumatic stress. It found that every financial professional interviewed reported medium to high levels of stress in the aftermath of the financial crisis, and that 40% of planners reported severe symptoms, such as not sleeping or having trouble concentrating.
Personally I don’t think it is helpful to equate the stress associated with market volatility with the difficulties of dealing with severe post-traumatic stress. But I do think it was telling to read that “a 2012 survey by Curian Capital found 63% of over 1,000 independent financial advisors surveyed had adopted more tactical asset-allocation strategies in the aftermath of the financial crisis.”
A tactical asset-allocation strategy is a symptom of “don’t just stand there, do something!” whereas a calmer and more reasoned approach might be “don’t do something, just stand there!”
The best antidote to the stress of market volatility is to understand that the markets are inherently volatile and simply not expect them to do anything else.
Nevertheless, I appreciated the article’s final conclusions:
For me, the financial crisis confirmed my faith in both my process and philosophy, but it also forced me to think concretely about the ways I react to uncertain times. Here’s my advice on how to manage the unavoidable stress of our profession.
We prepare an investment plan for clients so that they can handle the unexpected market gyrations and stay on course to reach their goals.
Yet to effectively manage our stress, advisors must first admit that we are not immune to the same, sometimes irrational fears of individual investors. We must also accept that we can be swayed by harmful behavioral tendencies of our own — from overconfidence to herd behavior.
Just as an investment plan keeps clients focused when others feel exhausted by market volatility, advisors need investment and practice management road maps to provide direction and prevent emotional decisions when the journey seems the toughest.
In addition to documenting general practice management procedures, I have spelled out steps to follow in a downturn, both in terms of communicating with clients and managing their portfolios.
Additionally, I routinely review with clients our evidence-based investment approach, which is grounded in decades of solid academic research. We invest in funds offered by Dimensional Fund Advisors, where University of Chicago Nobel Prize winner Eugene Fama and Yale’s Roger Ibbotson are board members and Dartmouth’s Ken French serves as the firm’s head of investment policy.
Just knowing that can do a lot to curtail stress for both advisors and clients.
Perhaps the most interesting phrase in the article was “our evidence-based approach.” That phrase limits any tactical asset-allocation strategies to those with some evidence that they will, over long periods of time, either boost returns, limit volatility, or both.
We have a series of articles covering the evidence-based approach of Fama and French and other Nobel Prize winning economists that will help you understand how to seek building portfolios along the efficient frontier of investing.
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