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Know Your Role: Investment Counselor Vs. Behavior Coach Part 2

Know Your Role: Investment Counselor Vs. Behavior Coach Part 2

| May 12, 2021
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Last week, we started our monthly Edu-Blog series for May with a discussion on a financial advisor’s other roles, specifically that of a behavioral coach. In that discussion, we talked about the adverse effects sudden and emotional financial decisions can have on the overall health of your savings and investments. This week I want to take a look at the top reason emotional decisions are made when investing: market volatility.

Market volatility is every investor’s nightmare. We all dread market dives and what they mean for the long term. Investors often ask their advisors what they mean, how long they will last, what they should do? As we all know too well, though, no one has a crystal ball, and so no one can tell us definitively what each round of market volatility means. With this uncertainty comes irrational actions like selling investments the second there is a dip in the market. Like we talked about last week, panic selling can cause more volatility in the markets. 

Often the media triggers panic selling by inflating investor concerns through their reporting. By now, you all know how I feel about the media and their effect on investors and the markets. We constantly hear stories that are made to seem more doom and gloom than they really are. The markets drop slightly these stories come out, investors panic and sell in an attempt to “lock-in” and gains they have made. The most important thing an advisor can do here is step in, calm rattled nerves, and reinforce the importance of staying in the markets; long-term investing is the best way to ensure you are making the most of your investable assets.

In fact, a study by Vanguard showed that working with a financial advisor can add up to 3% in value to an investor’s portfolio. The reason behind this, the study found, was that clients didn’t end up making adverse decisions when greed or fear was driving markets. Client’s with advisors tended to stick to their financial plans even when emotions ran high. This allowed clients to participate in market rises and recover any losses that volatility may have caused. Remember, you can’t make money in the market if you aren’t in it. The Vanguard study concluded that behavioral coaching provided by an advisor was responsible for about 1.5% of the total 3% of additional return added to investors portfolios.

This Vanguard study showed what you and I already know; having a process-based plan and managing client anxiety is why an advisor can add value to a client’s portfolio. My process has always been creating a date-specific dollar-specific financial plan for my clients to prepare them to achieve their financial goals. We advocate for systematic reviews, rebalancing when needed, proper asset allocation, spending planning, etcetera to ensure that your money works hard for you and that you are prepared to handle anything, including market volatility. My goal is to educate my clients so that they can make financial decisions in a rational and orderly way. We never want to put you in a position to react to news about the markets and the economy. Markets are cyclical; everything we go through comes back around. Having a financial plan that is goal-specific, not market-focused, is a long term approach that removes uncertainty.

All that being said, I have always felt that the best thing I can do as a financial advisor is listen. You know this is difficult for me because I love to talk, I have a lot to say, and I am pretty passionate about financial planning. Like I said last week, advisors wear a lot of hats, but to me the foundation of everything we do for our clients lies in knowing you as well as you know yourself. The only way to do that is to LISTEN! Sitting down with you and understanding your concerns, hopes, dreams, goals, how you feel about money, and what keeps you awake at night is the only way we can create a plan that truly works for you. 

At the end of the day, your money is about way more than just dollar signs. Your plan needs to account for your temperament and your values. If your advisor doesn’t get that, then you may not be able to get the most out of your relationship, your money, and your long-term plan. 

Next week, we will dig into some ways to avoid getting emotional about the markets and investing. Of course, my favorite one is - let your advisor do the hard work! 

Stay tuned for Part 3!

P.S. If you enjoyed what you've read here and found it beneficial, we encourage you to share it with your friends and family. I firmly believe that an educated investor is a healthier and more confident investor. 

Until next time...

This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes.

Investing involves risks including possible loss of principal. No strategy assures success or protects against loss. All performance referenced is historical and is no guarantee of future results. Investing in stock includes numerous specific risks including: the fluctuation of dividend, loss of principal and potential illiquidity of the investment in a falling market. Bonds are subject to market and interest rate risk if sold prior to maturity.

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Options are not suitable for all investors and certain option strategies may expose investors to

significant potential losses such as losing entire amount paid for the option. The fast price swings in currencies will result in significant volatility in an investor’s holdings. Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. LPL Financial doesn’t provide research on individual equities.

Source: Portfolio Construction An Advisor's Role as Behavioral Coach

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