Managing the Rollercoaster Ride of Investor Sentiment

We’d all like to think that rationality rules our financial decisions, but the fact is, we’re only human. 

The emotional component of decision-making, financial or otherwise, is undeniable and therefore shouldn’t be underestimated or ignored. Instead, those feelings need to be acknowledged, understood, and managed so they can be kept in check. Market fluctuations can cause any investor to react, rather than make a well-reasoned decision. With the right tools, however, financial advisors can help their clients stay in control of the emotional rollercoaster ride that those changes often set in motion.

Dealing With Market Volatility
Investors may experience a range of emotions during periods of market volatility such as fear, anxiety, and even panic. These feelings can have a strong influence on their decision-making which could lead to impulsive decisions that may negatively impact long-term investment strategies. In addition, investors may be prone to certain behavioral biases, such as loss aversion and herd follower bias, which can cloud their judgment and fuel irrational decisions.

Our research shows that financial advisors can yield immense value by preventing clients from making these types of ill-timed impulsive decisions. By using behavioral finance tools and techniques, they can help their clients stay disciplined and focused on their long-term goals, even during periods of uncertainty.

Behavior Tools for Advisors
When armed with behavioral finance technology, financial advisors can use personalized behavioral insights to educate and guide clients through challenging times. They can help them understand their emotions and biases and provide practical solutions to help them make rational investment decisions. They can communicate with clients regularly to provide reassurance and address any concerns they may have about their investments.

Putting Market Mood to Work
One of the unique features of Financial DNA is what we call Market Mood (also known as Market Sentiment), and it’s especially helpful when it comes to managing the emotional toll of dramatic market changes. We track real-time market activity and match it with what we know about each investor to predict how they may feel about market changes. With this remarkable tool, advisors can peer into the minds of their clients, anticipating whether they will be gripped by fear, consumed by exuberance, or lingering somewhere in between. It's like having a crystal ball that reveals a client’s emotional landscape at any given moment.

The DNA Behavior web app predicts seven distinct moods and provides customized behavioral management tips that give advisors a proactive edge. Clients can then be “nudged” according to their financial behavior style in consideration of their current Market Mood.

Moods when investment returns are positive:
Comfortable
Exuberant
Watchful
Apprehensive

Moods when investment returns are negative:
Comfortable
Opportunistic
Concerned
Fearful

Mood Management Strategies
With insight into Market Mood, there are various behavioral finance strategies that can be used to help investors stay disciplined and focused no matter what is happening in the market.

• Focus on the Long-Term: Advisors can encourage clients to focus on long-term investment goals rather than short-term market fluctuations.

• Keep a Positive Outlook: They can use visualization techniques to help clients maintain a positive outlook and avoid impulsive decisions.

• Tailor a Plan: They can help clients create a structured investment plan that accounts for market volatility and considers their risk tolerance and investment goals.

By accurately predicting and managing a client's emotional reactions to market changes, advisors can guide them toward making sound, rational decisions that align with their financial goals. With the fusion of real-time market data, behavioral insights, and personalized recommendations, they hold the key to unlocking the full potential of their client’s investments.

Offer Transparency
Nothing solidifies a relationship quite like transparency, and it’s just as true for advisors and their clients as it is for any other two people. By having clients complete the DNA Natural Behavior Discovery process, advisors and their clients gain access to their Market Mood predictions, behavioral biases, and more. Together, they can review the results, discuss them, and use them to fuel informed decision-making.

Elevate Your Expertise
Do you want a transformative advantage that will elevate your expertise and enhance client satisfaction? By aligning your clients' behavior with their Market Mood, you’ll be able to provide practical solutions to help them make clear-sighted investment decisions, even during market turbulence. You can help them put impulsive decisions in the rearview and usher in a new era of informed and measured investment choices. You’ll be part of setting a new standard for personalized financial guidance!