How to Help Clients Manage Herding Behavior Through Coronavirus Volatility
With investors in fight-or-flight mode, here's how to make sure it doesn't affect their finances.
|Editor’s note: Read the latest on how the coronavirus is rattling the markets and what investors can do to navigate it.|
The biggest threat to investors’ financial plans may not be COVID-19, but rather their own minds. As market volatility continues, one of the precautionary tips making the rounds among social circles is to get out of the market. Even if an investor manages to avoid panicking after those conversations, a look at the news or a single scroll on their news app may bring their worries back to the forefront. In times like these, even the most logical investors can have trouble staying on track.
To help your clients manage their emotions through this turbulence, it’s important to first understand the psychological drivers behind their behavior. From there, you can work on separating their biases from their decisions moving forward.
When in Doubt, Herding Behavior Tells Us to Follow the Crowd
During times of market volatility when many investors are running for the hills, it’s natural to want to follow. This is a common phenomenon many financial professionals are familiar with: herding behavior.
In a time when many investors may be falling prey to this bias, here’s a quick primer on what can drive this behavior:
How to Help Clients Think Twice About Herding Behavior
Although our minds may naturally work against us in these turbulent times, there are ways to help your clients stick to their long-term plans:
Although it may seem irrational to you that a client is following the crowd, it may not be irrational at all. Your client may be using a shortcut that generally works but simply isn’t appropriate for this scenario. During these tough times, it can help to understand what’s behind your client’s behavior so you can help steer them in the right direction.
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