Many investors know what they should be doing, like saving for retirement and their children’s education, diversifying and rebalancing their portfolios, and building a retirement nest egg. The ongoing challenge for advisors is getting investors to actually do these things.

Why all the foot dragging? Because investment behavior is predominantly governed by emotion rather than reason. Investors’ heads tell them to invest for the long term and to follow a process rather than succumb to the ups and downs of a volatile market. But emotions–most commonly greed and fear–can derail the best intentions and cause even savvy investors to make foolish decisions.

Most advisors already know that emotions, not financial analysis, move the retail markets. Whether a client is knowledgeable or unknowledgeable about the markets, chances are good that emotions are driving her ultimate investment decisions.

For advisors, this means that clients need more than financial advice. They need behavioral advice. They need help setting long-range financial goals, developing an investment plan, and then sticking to it. Equally important, they need help steering clear of the seven deadly sins of investing: emotion, disorganization, myopia, impatience, greed, arrogance, and cowardice.

Historically, these sins have taken a heavy toll on investors’ financial well-being. Between 1984 and 2000, for example, the annualized return for the average stock fund was 13.1%, while the return for the average stock fund investor was only 5.3%. Similarly, from 1984 to 2002–a time period that includes the dot com downturn and the beginning of a recovery–the annualized return for the S&P 500 was 12.2%, yet the average stock fund investor realized only 2.6%. The performance differential may stem from several factors, but first and foremost among them are that investors committed one or more of the seven sins.

The best way for investors to counteract these sins is to adopt and adhere to a long-term investment plan. For advisors, you should familiarize yourself with the sins and the ways to help clients avoid them, and maybe to help yourself avoid them as well–after all, you’re only human, too.

Sin #1: Emotion

This sin drives almost every decision investors make. How can advisors counteract it? By putting those emotions into perspective and continually underscoring the importance of portfolio diversification. Just as consumers develop emotional attachments to certain brands, most investors have emotional connections to particular stocks, funds, or investment styles. Maybe the investor’s son-in-law works for a particular airline, and the investor continues to hold that stock in her portfolio out of a sense of loyalty, despite the fact she should have long since sold it.

Or take, for example, the fact that 74% of all new money invested in the first quarter of 2000 went into growth funds. Why? Because it was the height of the frenzy–growth funds had built significant momentum and investors were chasing performance. Just when investors should have been taking some of their chips off the table, they were instead going all in.

Similarly, advisors need to step in when investors start to anchor. Anchoring, or the inability to let go of a past event, can seriously undermine an investor’s future feelings about a stock, a fund family, or even an entire industry. The freefall of the technology sector in 2000 and 2001 created a level of fear and aversion to technology stocks that still influences many investors. By helping investors approach market opportunities as fresh every day, advisors can begin to shift the decision process from emotion to reason.

Sin #2: Disorganization

This close cousin to sloth is deadly. Investors have a tendency to have too many accounts and to spend too little time reviewing and analyzing their holdings. Without knowing it, they can seriously overweight certain industries or sectors, holding the same stocks in individual security accounts as are held in mutual funds they own. An advisor that reviews the client’s entire portfolio can identify these overlaps in an effort to help the investor attain true diversification and avoid inadvertent overweighting. As a result, swings in particular holdings won’t lead to disproportionate declines.

Sin #3: Myopia

This failing–the inability to see the forest for the trees–keeps many investors from seeing and acting on long-term trends. A sudden spike in oil prices, for example, may influence some investors’ willingness to invest in energy stocks or funds, regardless of the sector’s long-term outlook. It’s the advisor’s task to help clients focus on separating fear from fact, i.e., to develop a longer-term perspective and help them invest accordingly.

Sin #4: Impatience

This sin, many say, is a way of life in the United States. Americans typically hurry from one task to the next, bristle at waiting in line, and drive aggressively merely to get from one destination to the next. Clearly though, the name of the game in investing is patience. Historically, up-markets have occurred three times as often as down-markets. The wise investor waits out the down markets and reaps the rewards during the eventual upturn.

Helping clients see the big picture and developing a contingency plan for unexpected market downturns can free investors from short-term worries and reassure them of their long-term prospects. It is during down markets that financial advisors can add the greatest value if they encourage clients to sit tight–or even increase their investments–when the overall market and their holdings are experiencing weakness.

Sin #5: Greed

A fellow traveler to impatience is greed, which can move an investor to either sell a rising holding too soon, or to jump into a hot investment without a valid foundation for doing so. Greed may be the single largest hurdle for advisors to overcome with clients. In an era of instant news, the challenge for advisors is to encourage clients to view moderation and long-term growth, not instant gains, as their primary goals. A downside of technology is its ability to track investment performance on a minute-by-minute basis. Another is the ease with which investors can move money from one investment to another without much due diligence. Advisors add value by helping investors change their performance horizon from “real-time gains” to “long-term growth.”

Sin #6: Arrogance

This sin is a close relative to greed. When the markets are robust and returns are high, arrogant investors can begin to feel invulnerable. Just as they forget that performance will get better when the market is weak, so, too, do they forget that performance will eventually falter when the market is strong. This forgetfulness can lead to imprudent investment decisions.

Reminding clients of their long-term investment goals and the investing process can help steer them clear of arrogant decision-making. You might pass along to such clients that old Wall Street adage: “Be a bull, be a bear, but don’t be a pig.”

Sin #7: Cowardice

At the other end of the spectrum is this deadly sin. Clients who have been burned in the past, or who tend to be more conservative than others are more apt to feel the sting of even the smallest losses. At the extreme, they may invest only in cash equivalents, and completely ignore equities. But investors need to be told to expect losses and to realize that enhanced net worth is the goal of investing. Because they fear the losses more than they like the gains, working with cowardly clients to create a plan that allows for fluctuations but emphasizes long-term asset accumulation can help ward off mistakes.

A New Model of Advice

For advisors and investors alike, the key to overcoming behavioral barriers is not only having an effective plan, but sticking with it. Such planning is best supported by a robust investment process, one that is long term in focus and stresses asset allocation and diversification. While such a process cannot prevent investors from making poor investment decisions, it will help keep them disciplined and focused on rational considerations. When combined with professional investment advice, an effective process can help investors:

  • Turn emotion into reason
  • Replace disorganization with focus
  • Offer perspective as a cure for myopia
  • Counter impatience with patience
  • Mitigate greed with reality
  • Temper arrogance with humility
  • Inject a sense of perspective into fearful situations

As advisors help investors move from the seven sins to a long-term strategy of reality-based investing, they will need to be part planner, part coach, and part psychotherapist. While this may seem like a formidable task, the rewards are equally great: a long-term relationship based on trust and marked by solid, sustainable performance.

Chris Blunt is executive VP, retail investments, for New York Life Investment Management in Parsippany, New Jersey. He can be reached at chris_blunt@nylim.com.