The stock market is getting hammered. Every penny that the market has gained over the last three-plus years has been wiped away. Nothing and no one is safe. But it’s not just your portfolio or your clients portfolios that are taking a beating, it’s your brain too.
Stress wreaks havoc on the human brain, and you’ll need to work hard to keep it from panicking and laying waste to all those long-term investing goals you put in place for yourself and your clients.
For financial advisors, a market crash is double the stress. You have to worry about yourself and your clients. You have to have to keep two sets of people calm.
Market crashes are already terrifying, toss in a dose of global pandemic and it becomes a once-in-a-lifetime sort of dread. Compounding matters is that many of us happened to be isolated.
Understanding The Stress
Peter Sokol-Hessner, a cognitive neuroscientist at the University of Denver, told the Wall Street Journal, “Stress is going to make investors less of who they are, an impoverished version of themselves. “It causes you to fall back on simpler methods of approaching your world. You have a decreased ability to use your previous experiences and knowledge to make smart choices in new settings.”
Acute stress causes your prefrontal cortex, the area of the brain responsible for long-term planning, to become less active. When our bodies get ready to respond to a threat with a flight-or-fight response, it affects our cognition and perception. Our attention and focus narrow. Tunnel vision.
That same stress is the same one felt as we watch the markets crash on television. It can blind us from the rest of the world and stop us from noticing the good things happening right next to us.
“As your threat sensitivity rises, you’re more likely to bias your predictions toward something bad happening,” said Candace Raio, a cognitive neuroscientist at NYU Langone Health in New York, in the same WSJ article. And that can lead to not thinking straight, “In looking for the quickest way to resolve uncertainty and to assure safety and survival, you might also be weighing what other people are doing more than the objective information in front of you.”
Furthermore, stress affects your working memory and narrows the choices you consider when coming to a conclusion, impairing your ability to think flexibly.
How to help your clients make good decisions now
The market is crashing, and as much as you’re responsible for yourself, you’re also responsible for your clients.
First, try to gain control over some part of your environment. Once you feel a bit more in control, that will help you continue to pursue your goals and help you get your clients moving in the right direction as well.
Take things slowly and don’t make any huge decisions.
If you or a client is desperate to reduce market risk, commit to a phased retreat similar to a conventional dollar cost averaging program. Automate a fixed reallocation every month over the next year.
Another option is directing their dividends into cash instead of more stock. That should give them some free cash, and make them feel a little more in control.
Remind your clients to forget what they paid for a stock or fund. Tell them to think about them like gifts. If they are now 20 percent off, would they want to sell those gifts or buy more?
What’s important is remaining calm. Do whatever you need to do this.
Effects Of Isolation
Isolation can also be a threat to your mental health and therefore your portfolio as well. No social contact makes it harder to regulate your emotions. Do your best to connect with your friends and family. Call them, text them, email them, whatever it takes to stay connected. Do something calming together and let that calmness spread across each other and onto your and your clients portfolios.