How can advisors help clients not only stay invested in the stock market during downturns like the one experienced in March but also take advantage of opportunities to buy discounted assets?
That was the question a recent Morningstar behavioral study tried to answer. The study was conducted in May by senior behavioral scientist Stan Treger.
First, he separated 880 investors almost equally into three groups and told each different narratives, known as conditions, which substituted for what an advisor might convey to clients.
Close to 80% of the study group were identified as active investors.
One group was told about historical market performance and shown a graph that displayed the 15-year growth of $100,000 investment in the S&P 500, starting during the downturn in 2005. The S&P 500 essentially tripled in value since then.
For another group, the downturn was framed as a reason to stay in the market. They heard a quote from Vanguard founder Jack Bogle that said their investment success depended on personal character, guts and “the ability to realize at the height of ebullience and the depth of despair alike that this, too, shall pass.”
For a third group, the downturn was framed as an opportunity to buy stocks at a discount. “This is the moment we’ve been waiting for. Now we will be able to buy investments at bargain prices,” they were told.
Afterward, study participants were asked if they wanted to make changes to their portfolio by selling or buying. Only 48 reported they would sell, 506 said they would stay put, and 326 said they would buy more stocks.