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February 02, 2021 at 09:25 PM
While the last 12 months have been volatile and uncertain on many levels, the relentless roller-coaster ride reinforced an essential truth: As wealth managers, our value lies in our ability to coach, educate and provide a framework for clients to feel confident that their portfolios can withstand any market environment and deliver a safe and comfortable path to retirement.
If you are an advisor seeking a truly diversified approach to capturing market rates of return, it’s essential to consider your clients’ natural biases, utilize sound investing principles and stick to your guns.
Here are three ways to reimagine both your client coaching strategies and portfolio allocations this year, to set clients up for long-term financial success.
1. Recognize and avoid behavioral biases.
When constructing portfolios for long-term growth, succumbing to behavioral biases can prompt short-term decisions that deviate from your clients’ financial plans. Three biases in particular to avoid? Herding mentality, recency bias and false patterning bias.
Herding mentality is, quite simply, following the herd — whether it’s jumping out of the market or chasing a hot new stock because everybody else seems to be. In each case, such behavior can have a detrimental effect on a long-term portfolio. For example, moving to cash after a significant market crash — like what we saw in 2008 and in 2020 — often means missing out on major gains when the market recovers.
Recency bias is remembering more recent events over historic ones. As human beings, our memories are flawed. We tend to better recall market upsides than downsides, and this can hurt an investor’s ability to follow their long-term plan — especially during a bear market.
Similar to recency bias, where an investor’s take on a certain time period is skewed, is false patterning bias, where investors become trapped in a belief that the same pattern will continue.
For example, after the market dropped last March, many believed it would continue to drop indefinitely. There is no empirical evidence to support the idea that the market follows any sort of pattern.
In hindsight, we can see how wrong it was to think markets would continue to fall, and yet the next time the market drops, the same panic is sure to set in again. It’s human nature, after all.
2. Don’t be fooled Into stock picking.
When it comes to allocating to a retirement portfolio, stock picking and timing the market are akin to gambling with your clients’ money.
A good recipe for a portfolio that can stand for the long term contains a combination of international stocks, U.S. equities and emerging markets — without overallocating to one over the other. It’s also crucial to force yourself to rebalance: Invest in high-quality short-term fixed income and buy equities when they’re low — something easier said than done.
Constructing a portfolio with these elements can help to counteract any behavioral biases you hold, forcing you and your clients to stay in the markets and make investment decisions that are beneficial for long-term success.
Mark Matson is the founder and CEO of Matson Money, a wealth management and advisor coaching firm based in Scottsdale, Arizona. Matson Money works with 541 advisors and 33,000 investors across the U.S.