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emails are sent
Google searches are made (5 billion total web searches)
messages are sent over WhatsApp
Source: World Economic Forum, 2019
expertise. The news environment used to be more heav- ily mediated, relying on qualified experts. The internet has created room for more diverse perspectives, but it’s also provided a soapbox for anyone with an opinion.
“The average investor doesn’t have the expertise to separate the nonsense from the good advice,” Lewis says. This creates an opportunity for advisors. Cory Clark, chief
marketing officer at Dalbar in Marlborough, Mass., says the news environment has opened up a coaching role that didn’t exist 10 or 20 years ago. Advisors need to be able to help investors “deal with the stimulus that they’re getting from all different angles,” some of it promulgating fear or greed.
“There’s so much more information out there to impact behaviour than there ever was before,” he says. “It’s something advisors really need to think about as part of their practice and as a way to add value.”
Learning to do nothing
Darren Coleman, senior vice-president and portfolio man- ager, private client group, at Raymond James in Toronto, finds himself empathizing with doctors in the age of WebMD and other sites that enable self-diagnosis.
“We have a similar challenge to doctors, where some- body shows up and says, ‘Oh my god, I must have den- gue fever,’” Coleman says.
“You have to take the client seriously from an emo- tional perspective, but you also have to step back and say, ‘What are the symptoms?’ and go through your regular protocol. They’re being bombarded with so much information; it’s normal for people to be confused.”
Advisors may not have an easy time curtailing clients’ news consumption. Many young clients have grown up researching every purchase, reviewing options exhaust- ively online. For some, it won’t be any different with investments, and they’ll expect their advisor to be at least as informed as they are.
New retirees who suddenly have a lot of time to kill may find themselves watching more business news and worrying about the latest geopolitical flareup. Associating with other retirees may reinforce certain predilections.
Advisors can help clients become smarter news con- sumers. Basinger encourages his team to read, watch and listen to news that offers contrary perspectives. “We all suffer from confirmation bias, where we want to read things that support our pre-existing opinions or views,” he says. “Forcing yourself to consume the other side, even though it might not change your mind, will at least open your eyes to
the other side of the argument.”
Encouraging smarter news consumption is
the start; the bigger job is managing what clients do with the information. Just because the news is updated every second doesn’t mean accounts have to keep up. Training clients to do nothing can be surprisingly difficult.
“We’re coded to want to do two things: protect what we have, and react,” Basinger says. “Not doing anything when you hear news is very difficult for some people, and I think that can very often lead to making mistakes.”
Basinger and his team calculated the potential damage from those mistakes. Using Bloomberg data, research- ers at Richardson GMP examined the cost of reacting to market weakness over the last 30 years. Investors who started with $10,000 in an all-equities portfolio and held it would have had $150,000. Those who sold every time the market dropped 7.5% and sat in cash for six months would have had $86,000 at the end of the period.
Being at the end of a historic bull run skews the results, Basinger says, but it’s still a useful comparison. People want to react to events, and moving into cash is action, he says. It’s also damaging to portfolios.
Various studies support a buy-and-hold strategy. The most famous was conducted by University of California researchers in 2000. They examined data from 66,000 households and found that those who traded frequently earned average net annual returns of 11.4%; those who traded infrequently over the same period earned 18.5%. The conclusion (and the paper’s title): trading is hazardous to your wealth.
“The media causes people to pay attention to their account when they should be just letting the strategy work,” Lewis says. “They’re encouraged to overtrade and that harms their returns.”
The discrepancy goes beyond commissions and trading expenses, Lewis says. Loss aversion — the idea that people experience more pain from losses than they do pleasure from equivalent gains — drives destructive behaviour.
“One of the results of anxiety and loss aversion is information search: people tend to look for information to reduce that anxiety,” he says.
This search for reassurance may lead to places that are least likely to provide any, such as social media and 24-hour news networks. Getting hourly updates on the markets — or on geopolitical concerns, such as the number of new cor- onavirus cases — can make clients think action is needed.
“It’s an interesting behavioural tendency: we feel like if we’re not doing anything about this, then it means I’m ignoring the problem,” says David O’Leary, founder and principal at Kind Wealth in Toronto.
But following the markets too closely “makes time feel like forever,” he says. “If you look numerous times per day, a month is going to feel like a year.”
Lewis compares the behaviour to weight loss studies. People who checked their weight daily and tried to make sense of minute changes became more anxious. Those who checked once a week were less anxious, made bet- ter health decisions and were ultimately more successful at losing weight. “The parallel with your investment port- folio is, if you’re looking at it to the penny every day, it forces you to make short-term decisions rather than long- term decisions. It becomes self-defeating,” Lewis says.
Advisors should have clients commit to only checking their portfolios quarterly, he adds.
                                     “Not doing anything when you hear news is very difficult for some people, and I think that can very often lead
to making mistakes”
MARCH 2020

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