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Embracing stress improves our ability to concentrate and make decisions. The value to advisors – and their clients – is obvious.
The investment markets are ruled by greed and fear. Our behavioral tics impede our ability to make rational investment decisions. This is as true for advisors as it is for clients – although we assume that advisors are more skilled at restraining their impulses. But when asset markets enter a period of volatility, as they have done this year, how much worry, greed or fear is healthy?
Any emotion has healthy aspects. We tend to think of greed, for instance, as morally suspect – but it can be a tremendous motivator for success. The same is the case for ambition: It drives us to improve ourselves, to innovate and to enhance life for our families. Fear leads us to be vigilant, to use caution, to protect ourselves as well as others around us.
As advisors, we often counsel clients to dismiss their emotions, or at least to discount them. But that may be the wrong advice. It could well be more productive to embrace our emotions, particularly the negative ones. Take, for example, worry. Often thought to be the bane of investors, worry can be a positive emotion. According to a 2010 study by four U.S.-based professors, “the act of worrying is sufficient to facilitate an attentional bias to threat.” In other words, people who are worried are more successful at detecting threats.
So if you’re concerned about the markets, worry could make you pay more attention – and more successful attention – to threats to your clients’ portfolios. At that point, it’s up to the advisor to counsel clients on which protective actions, if any, might be appropriate, depending on their risk tolerance and capacity to withstand portfolio losses.
The ability to get stressed out may be our secret superpower. If you don’t see stress as a negative, but instead welcome it, it will make you healthier – and even smarter, says health psychologist Kelly McGonigal, Ph.D., author of The Upside of Stress (Penguin Random House). You can think about the symptoms of stress – the pounding heart, the rapid breathing – as prepping your body for action, she says. Studies show that “participants who learned to view the stress response as helpful for their performance, well, they were less stressed out, less anxious, more confident.” The body is ready to rise to a challenge, whether that’s fighting off an enemy, fleeing a pursuer – or, more likely in today’s world, figuring out how to deal with a problematic colleague or client.
The importance to investors of being able to thrive under stress is obvious. “Flight or fight,” the primal reactions to stress, are not reliable indicators of when to trade a portfolio. But in moments of unusual stress, our ability to concentrate and make decisions actually improves. A 2007 study by the National Institute of Mental Health asked healthy men to stress themselves briefly by immersing a hand in freezing water. Right afterward, their performance on cognition and learning tests was superior to that of a control group. This is a recent example of a series of human and animal tests that show that moments of acute stress improve both memory and learning.
Extended periods of stress, however, do the opposite. Bad for both brain and body, extended stress creates breakdowns in memory retrieval and decision making along with increasing the risk of death. This may be why, at the depths of the 2008-2009 financial meltdown, even professional investors made panic moves. It’s hard to stay strong.
You can use a little bit of stress to your benefit by taking on the new task of creating a strategy. Joy, like fear, stimulates the body. Use today’s volatile markets to inspire you to create investment scenarios that suit your clients for the long run – then count on digital wealth management tools to visualize long-term implications and to help you stick to it when volatility makes you want to scramble.
Patrick Beaudan is co-founder and CEO of Emotomy, a cloud-based wealth management platform. He is also a member of the board of the National Association of Active Investment Managers (NAAIM). For more information, go to Emotomy.com.
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