Stress Management for Financial Advisors

Crosby_2015Dr. Daniel Crosby, Founder, Nocturne Capital

The dictionary definition of stress is, “a specific response by the body to a stimulus, such as fear or pain, that disturbs or interferes with the normal physiological equilibrium of an organism.” But one can scarcely conceive of a more pointless construct to define than stress, because just as the Supreme Court famously said of smut, you know it when you see it. This is especially true of financial advisors, who inhabit one of the most stressful professional roles in the modern corporate landscape.

shutterstock_247024930Health.com named financial advisors to their list of 10 Careers with High Rates of Depression.” A study titled, “Casualties of Wall Street” found that 23% of advisors surveyed had significant signs of clinical depression while another 36% percent showed mild to moderate symptoms. And a study published in the “Journal of Financial Therapy” found that the vast majority of financial professionals surveyed experience medium to high levels of post-traumatic stress in the wake of the 2008 crisis.

So what’s an advisor to do? Well, the tips for managing of stress are often simple and intuitive. So simple in fact, that they may be overlooked by advisors accustomed to a life filled with risk and complexity. Notwithstanding their simplicity, try the tips below to start feeling better today:

Tame technology – The 24/7 availability of technology such as email has done a great deal to increase the stress level of people everywhere. Having a means of being reached at any time by your clients means that you are in a constant state of heightened readiness. Set limits on your electronic availability by turning off or limiting the times of day when you “plug in.” These periods of electronic disengagement will allow you to connect with others socially, exercise, and pursue hobbies, all of which have been proven to combat stress.

Damsel in Eustress – One common misconception is that stress is always the result of negative events. Recently, an advisor was crying in my office, unable to pinpoint the reason for her feelings of anxiety. As I learned more, she revealed that she was overseeing a number of projects at work, preparing for a wedding, and readying herself for a move. Although each of these things was positive, the cumulative effect of all of this positive change was quite stressful. Remember, the body cannot distinguish “eustress” (literally, good stress) from bad stress, so be sure to take a moment to relax, even when things are going your way.

shutterstock_41447092As a Man Thinketh – Too often, we accept the fact that things just “are” and that we have little control over our lives. Viktor Frankl said it best, “Between stimulus and response there is a space. In that space is our power to choose our response. In our response lies our growth and freedom.” The things that happen to you can be as positive or negative as you construe them to be. If you choose to interpret life events in an upbeat and optimistic manner, you will position yourself for success in all areas, and achieve that success with calm confidence. For practice, try and think of five positive things to emerge as a result of the most recent economic volatility (e.g., spent more time with family).

Little Comfort – It is a strange paradox that all of the so-called “comfort foods” have the very opposite of the desired effect on stress levels. Caffeine causes elevations in heart rate and respiration that can mimic a panic attack. Alcohol depresses our mood and impairs decision making, and eating fatty foods provides a brief period of pleasure followed by sustained periods of regret and lethargy. While we understand that an evening run or a healthy meal may be advisable, our short-sighted bodies tell us differently in times of stress or sadness. The next time you are feeling down, let your brain drive your decision-making; your body will thank you later.

Fake Out – Have you ever heard the old saying, “fake it ‘till you make it?” Well, it turns out that science substantiates this pithy phrase. In the past, the conventional psychological wisdom was that we felt a certain way, and then exhibited behaviors that conveyed that emotion. Put simply, “I’m happy, therefore I smile.” What more research has found, is that the opposite is also true – “I smile, therefore I’m happy.” Research subjects who were instructed to smile, regardless of whether or not they were actually happy, saw an increase in mood. This recent evidence suggests that being proactive, maintaining a schedule, and acting happy can start to improve a negative mood. It turns out that, some of the times you feel least like acting upbeat are the times it could benefit you most.

The market is extremely volatile right now, but that doesn’t mean that your life needs to be. 2 to 3% of outperformance achieved by those who work with advisors, is predicated on your being an effective behavioral coach during times of uncertainty. It is only as you take steps to manage stress in your own life that you can effectively model the kind of behavior that most benefits your clients.

Views expressed are for illustrative purposes only. The information was created and supplied by Dr. Daniel Crosby of Nocturne Capital, an unaffiliated third party. Brinker Capital Inc., a Registered Investment Advisor

The “Don’ts” for Periods of Market Volatility

Crosby_2015Dr. Daniel Crosby, Founder, Nocturne Capital

Having checked in this week with many of our advisors and the clients they serve, we know that this has been a stressful week for everyone involved in the market. On Monday, we wanted to provide a few proactive starting points and created a list of “do’s” for volatile markets. However, at times like this, knowing what not to do can be just as important as knowing what to do. With that, we present a list of things you should absolutely not be doing in periods of market volatility.

  • Don’t lose your sense of history – The average intrayear drawdown over the past 35 years has been just over 14%. The market ended the year higher on 27 of those 35 years. A relatively placid six years has lulled investors into a false reality, but nothing that we have experienced this year is out of the average by historical measures.
  • Don’t equate risk with volatility – Repeat after me, “volatility does not equal risk.” Risk is the likelihood that you will not have the money you need at the time you need it to live the life you want to live. Nothing more, nothing less. Paper losses are not “risk” and neither are the gyrations of a volatile market.
  • Don’t focus on the minute to minute – Despite the enormous wealth creating power of the market, looking at it too closely can be terrifying. A daily look at portfolio values means you see a loss 46.7% of the time, whereas a yearly look shows a loss a mere 27.6% of the time. Limited looking leads to increased feelings of security and improved decision-making.
  • Don’t forget how markets work – Do you know why stocks outperform other asset classes by about 5% on a volatility-adjusted basis? Because they can be scary at times, that’s why! Long term investors have been handsomely rewarded by equity markets, but those rewards come at the price of bravery during periods short-term uncertainty.
  • Don’t give in to action bias – At most times and in most situations, increased effort leads to improved outcomes. Want to lose weight? Start running! Want to learn a new skill set? Go back to school. Investing is that rare world where doing less actually gets you more. James O’Shaughnessy of “What Works on Wall Street” fame relates an illustrative story of a study done at Fidelity. When they surveyed their accounts to see which had done best, they uncovered something counterintuitive. The best-performing accounts were those that had been forgotten entirely. In the immortal words of Jack Bogle, “don’t do something, just stand there!”

Views expressed are for illustrative purposes only. The information was created and supplied by Dr. Daniel Crosby of Nocturne Capital, an unaffiliated third party. Brinker Capital Inc., a Registered Investment Advisor

Top 10 Things Smart Investors Never Say

With the market in flux, it’s important to think rationally and practice patience. To accomplish that, here are 10 phrases you should NOT be telling yourself:

  1. I got a great stock tip from a friend of a friend.” – Herding
  2. “This time is different.” – New Era Thinking
  3. “I should have seen the crisis coming.” – Hindsight Bias
  4. “I check my account on the hour.” – Myopic Loss Aversion
  5. “This is can’t miss!” – Overconfidence
  6. “It just feels right.” – Affect Heuristic
  7. “…but Jim Cramer said…” – Appeal to Authority
  8. “Rebalance? Why bother?” – Status Quo Bias
  9. “I’m on a hot streak right now!” – Gambler’s Fallacy
  10. “I can always start saving later.” – Hyperbolic Discounting

Views expressed are for illustrative purposes only. The information was created and supplied by Dr. Daniel Crosby of Nocturne Capital, an unaffiliated third party. Brinker Capital Inc., a Registered Investment Advisor.

Three Action Steps for a Black Monday

Crosby_2015Dr. Daniel Crosby, Founder, Nocturne Capital

By now you have no doubt heard about what is (sensationally) being referred to as “Black Monday.” Up over 60% YTD just a few short months ago, China now sits in negative territory for the year. Greece and Puerto Rico continue to weigh on investors’ minds and American markets invoked Rule 48 this morning, a seldom-used provision that allows market makers to suspend trading in an effort to smooth volatility and assuage panic.

With bad news seemingly everywhere and situated at the end of a long-in-the-tooth bull market, it’s not hard to see why investors are rattled. But at times like this, it behooves investors to take a deep breath and rely on rules instead of emotions. To assist you in this difficult time, I’ve prepared a handful of “do’s” for worried investors, with the “don’ts” to follow in my next post.

Do Know Your History – Despite what political pundits and TV commentators would have you believe, this is not an unusually scary time to be alive. Although you’d never know it from watching cable, the economy is growing (slowly) and most quality of life statistics (e.g., crime, drug use, teen pregnancy) have been headed in the right direction for years! Markets always have and always will climb a wall of worry, rewarding those who stay the course and punishing those who succumb to fear.

Warren Buffett expressed this beautifully when he said, “In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.” Such it has ever been, thus will it ever be.

Do Take Responsibility – Which of the following do you think is most predictive of financial performance: A) market timing B) investment returns or C) financial behavior? Ask most men or women on the street and they are likely to tell you that timing and returns are the biggest drivers of financial performance, but the research tells another story. In fact, the research says that you – that’s right – you, are the best friend and the worst enemy of your own portfolio.

Over the last 20 years, the market has returned roughly 8.25% per annum, but the average retail investor has kept just over 4% of those gains because of poor investment behavior. What happens in world financial markets in the coming years is absolutely out of your control. But your ability to follow a plan, diversify across asset classes and maintain your composure are squarely within your power. At times when market moves can feel haphazard, it helps to remember who is really in charge.

Do Work with a Professional – Odds are that when you chose your financial advisor, you selected him or her because of his or her academic pedigree, years of experience or a sound investment philosophy. Ironically, what you likely overlooked entirely is the largest value he or she adds—managing your behavior. Studies from sources as diverse as Aon Hewitt, Vanguard and Morningstar put the value added from working with an advisor at 2 to 3% per year. Compound that effect over a lifetime, and the power of financial advice quickly becomes evident.

Vanguard suggests that the benefit of working with an advisor is “lumpy”, that is, the effects of working with an advisor are most pronounced during periods of volatility (like today). They go so far as to break out the impact of the various services provided by an advisor, and while asset management accounts for less than half of one percent, behavioral coaching accounts for fully half of the value provided by working with a professional. Today is the day your financial advisor earns their keep. Don’t be afraid to reach out to your advisor during times of fear and seek reassurance and advice. After all, they are the one’s saving you more money by holding your hand than by managing your money!

Views expressed are for illustrative purposes only. The information was created and supplied by Dr. Daniel Crosby of Nocturne Capital, an unaffiliated third party. Brinker Capital Inc., a Registered Investment Advisor

Investment Insights Podcast – July 10, 2015

Bill MillerBill Miller, Chief Investment Officer

On this week’s podcast (recorded July 7, 2015):

What we like: Harvard study shows when there’s debt relief as part of the solution, countries tend to recover and thrive more quickly

What we don’t like: The emotional impact the Greek crisis has on investors, chiefly contagion and anger

What we’re doing about it: Touting behavioral finance; investors shouldn’t allow this anger or fear to dictate their investment decisions; encouraging the themes found in Personal Benchmark: Integrating Behavioral Finance and Investment Management 

Click here to listen to the audio recording

The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Holdings are subject to change.

 

Managing Emotions During Life’s Disruptions

Sue BerginSue Bergin, President, S Bergin Communications

It seems like a new survey comes out daily revealing how ill-prepared Americans are for retirement. Well, to reference one, now there is a study that shows two-thirds of those who have saved for retirement may still fall behind.

TD Ameritrade’s 2015 Financial Disruptions Survey shows that unexpected events have cost Americans $2.5 trillion in lost savings. [1] Typical scenarios involve unemployment or having to take a lower-paying job, starting a family and/or buying a home, assuming a care-taking role, experiencing poor investment or business performance, suffering an accident/illness or disability, divorce, separation, or becoming a widow or widower.

No surprise that any one of these events would cause stress. As explained in the best-selling book, Personal Benchmark, Integrating Behavioral Finance and Investment Management, stress triggers a move away from a rational and cognitive decision-making style in favor of an effective style driven by emotions. Research also has suggested that we experience a 13% reduction in our intelligence during times of stress, as valuable psychophysiological resources are shunted away from the brain in service of our ability to fight or flee. [2]

When under stress, emotional decisions tend to be myopic. We privilege the now and forget about the future. Decisions made under stress are also reactive. Since our body is being signaled that something dangerous is imminent, we tend to react rather than reason. Reacting is great for swerving to miss a car, but not such a great impulse to follow when it comes to setting a course that will traverse the next five years.

What we learn from the study is that the average length of the disruption was five years. These weren’t one-time events or blips on a radar screen. They were prolonged periods over that necessitated several financial decisions.

84% of those who suffered from disruptions indicated that prior thereto, they had been saving $530 per month for long-term financial goals/retirement. During the “disruption” savings were reduced by almost $300, which had a cumulative adverse impact on their long-term goal, on average of over $16,200.

Interestingly, the TD study asked how they could be better prepared for the unexpected. The vast majority focused on what authors of Personal Benchmark suggest in helping to manage emotions during stressful times, which is to focus on matters within their control. The top five responses included:

  • save more (44%)
  • start saving earlier (36%)
  • better educate self on investments (26%)
  • consult with a financial advisor (19%)
  • pay closer attention to investments (15%)

There are two key takeaways from this study. Expect the unexpected by doing as much advanced planning and saving as possible. And, when life does throw you a curve ball, manage your emotions by focusing on matters with personal significance and those that are within your personal control.

[1] http://www.amtd.com/files/doc_downloads/research/Disruptor_Survey_2015.pdf

[2] Dr. Greg Davies, Managing Director, Head of Behavioral and Quantitative Investment Philosophy at Barclays Wealth

The views expressed are those of Brinker Capital and are for informational purposes only. Brinker Capital, Inc., a Registered Investment Advisor.

Two Ways Advisors Can Help Clients Reduce Financial Stress

Sue BerginSue Bergin, President, S Bergin Communications

While all of your clients are unique when it comes to financial outcomes, they are likely to share one unifying factor—money being the top cause of their stress.

The American Psychological Association, which releases figures on stress, documented in their final report for 2011 (published in 2012) that, “More adults report that their stress is increasing than decreasing. 39% said their stress had increased over the past year and even more said that their stress had increased over the past five years (44%). Only 27% of adults report that their stress has decreased in the past five years and fewer than a quarter of adults report that their stress has decreased in the past year (17%).”

The same report shows that the top source of stress is money (75%), with work coming in a close second (70%) and the economy getting the bronze (67%). These results were validated by another study in which 63% of survey respondents indicated that they had some financial stress and another 18% rated their stress level at high or overwhelming[1].

It has been well established that stress triggers a move away from a rational and cognitive decision-making style in favor of a style driven by emotions. As the book Personal Benchmark: Integrating Behavioral Finance and Investment Management states, “Research also has suggested that we experience a 13% reduction in our intelligence during times of stress, as valuable psychophysiological resources are shunted away from the brain in service of our ability to fight or flee.” Experts suggest that emotionally-charged decisions are myopic (nearsighted), reactive, and associative.[2] All three of these predictable responses to stress are powerful ingredients for disastrous investment results.

Advisors can help clients manage emotion and associate stress in two ways:

  1. Manage the volatility in their portfolio. As the highs and lows of investments are brought under tighter control, so too will the emotions of the investors that hold them.
  2. Refocus clients’ attention on the appropriate things, such as matters with personal significance and those that are within their own control. Far too often, clients worry about externalities that have no direct impact on them or their wealth but which create a sort of vague anxiety that can never be truly calmed.

“By managing volatility as a means for controlling emotional extremes and by focusing on germane financial matters within personal control, investors can reap the benefits of appropriate stress without the paralyzing effects of excessive worry” (Personal Benchmark).

[1] http://www.financialfinesse.com/wp-content/uploads/2014/05/Financial-Stress-Report_2014_FINAL.pdf

[2] Dr. Greg Davies, Managing Director, Head of Behavioral and Quantitative Investment Philosophy at Barclays Wealth

The views expressed are those of Brinker Capital and are for informational purposes only.

Announcing our New Book, Personal Benchmark: Integrating Behavioral Finance and Investment Management

Chuck WidgerCharles Widger, Executive Chairman

Today is a very exciting day. I am pleased to announce the completion of my book, Personal Benchmark: Integrating Behavioral Finance and Investment Management co-authored by Dr. Daniel Crosby (@incblot) and published by John A. Wiley & Sons, Inc. This book is dedicated to America’s advisors, as it is these professionals who help investors achieve their goals.

We chose to write this book for three reasons:

  • The current investment advice delivery system is broken
  • In order to fix the system, it’s time to change the conversation toward goals-based investing
  • Behavioral finance needs to be automatic in order to be effective in improving investor behavior

The current investment advice delivery system is broken. The Great Recession of 2008-2009 was the wake-up call for investors and, in turn, advisors and the architects of the wealth management advice delivery system. No investor ever wants to experience a more than 20 to 30% decline in their investment portfolio. And yet, over the decades, this has not been an infrequent occurrence. Too often, encouraged by advisors, asset managers and the media, investors have sought to mimic returns generated by indexes. They tend to discover, albeit too late, that they really didn’t understand the risk involved with index-oriented or relative return investing. Then when the risk hits the fan, investors proceed to sell at market bottoms, having piled in at market tops. The existing system is not sufficiently helping investors.

bookIt’s time to change the conversation toward goals-based investing. We believe the solution to improving the investment advice delivery system begins with a focus toward goals-based investing. We believe it’s time to help advisors improve the investment experience for their clients. It’s time to turn emotion away from being an investor’s worst enemy to its best friend, time to get personal and help investors become more focused on their goals, time to change the conversation.

Behavioral finance needs to be automatic in order to effective. We also believe that in order to improve investor behavior, the elements of behavioral finance must be embedded within the investment management framework. This will help advisors and investors discuss, recognize, and manage behavioral biases. As a result, investors may avoid the typical pitfalls of wanting risk in bull markets, safety in bear markets, and failing to achieve expected returns because they do not properly manage risk.

I encourage you to visit http://www.personalbenchmarkbook.com for more information about Personal Benchmark: Integrating Behavioral Finance and Investment Management and hope that you find the book both educational and valuable.

The views, information, or opinions expressed in this blog are solely those of the authors and do not necessarily represent those of Brinker Capital, Inc. and its employees. The primary purpose of this blog is to educate and inform. This blog does not constitute financial advice. Brinker Capital, Inc. is a registered investment advisor.

Teaching Moments: Help Clients Shake the Emotional Hangovers

Sue BerginSue Bergin, President, S Bergin Communications

While the I-make-a-decision-and-forget-about-it approach might have worked for Harry S. Truman, it does not describe the vast majority of today’s investors.

According to our recent Brinker Barometer advisor survey[1], only 22% of advisors clients embrace Truman’s philosophy. The vast majority of clients suffer from emotional hangovers after periods of poor performance. They let the poor investment performance impact future decisions. Sometimes, it is for the better. In fact, 31% of clients made wiser decisions after learning from poor investment performance. Nearly half of the respondents, however, claimed that emotions cloud the investment decision following poor performance.

Bergin_LiveWithDecisions_7.30.14Another recent study, led by a London Business School, sheds light on how advisors can increase satisfaction by helping clients make peace with their decisions. According to the research, acts of closure can help prevent clients from ruminating over missed opportunities. To illustrate the point, researchers simply asked participants to choose a chocolate from a large selection. After the choice had been made, researchers put a transparent lid over the display for some participants but left the display open for others. Participants with the covered tray were more satisfied with their choices (6.30 vs. 4.78 on a 7 point scale) than people who did not have the selection covered after selecting their treat.

While the study was done with chocolate and not portfolio allocations, behavioral finance expert Dr. Daniel Crosby says that it can still provide useful insights on helping clients avoid what Vegas calls, “throwing good money after bad,” and psychology pundits refer to as the “sunk-cost fallacy.”

“Many clients are so averse to loss that they will follow a bad financial decision that resulted in a loss with one or more risky decisions aimed at recouping the money. If you detect that a client is letting emotional residue taint future decisions you should counsel them to consider the poor performance as a lesson learned. This will allow the client to grow from the experience rather than doubling the damage in a fit of excessive emotionality,” Crosby explains.

[1] Brinker Barometer survey, 1Q14. 275 respondents

The views expressed are those of Brinker Capital and are for informational purposes only.

Be The Benchmark

Dr. Daniel CrosbyDr. Daniel Crosby, President, IncBlot Behavioral Finance

If you’re like so many Americans, you probably made a list of your goals for 2014 back in January on New Year’s Eve. Whatever form those resolutions took; whether the goals were physical, financial, or relational, they likely had two foundational elements: they were specific to you and they were aspirational.

More than half way into the year, you may or may not still be on track to meet your goals. But regardless of your current progress, they will stand as personal reminders of the person you could be if you are willing to do the necessary work. As silly as it may sound, let’s imagine goals that violate the two assumptions we mentioned above.

Can you conceive of measuring your success relative to a goal that had nothing to do with your particular needs? What about setting a goal based on being average rather than exceptional? It defies logic, yet millions of us have taken just such a strategy when planning our financial futures!

shutterstock_171191216There is a long-standing tradition of comparing individual investment performance against a benchmark, typically a broad market index like the S&P 500. Under this model, investment performance is evaluated relative to the benchmark, basically, the performance of the market as a whole.

Let’s reapply this widely accepted logic to our other resolutions and see how it stands up. The CDC reports that the average man over 20 years of age is 5’9 and weighs 195 pounds. If we were to use this benchmark as a goal-setting index, the same way that we do financial benchmarks, the average American male would do well to lose a few pounds this year to achieve a healthier body mass index (BMI). Should we then dictate that all American males should lose ten pounds in 2013? Of course not!

The physical benchmark that we used is disconnected from the personal health needs of those setting the goals. Some of us need to lose well more than ten pounds, others needn’t lose any weight and some lucky souls actually have trouble keeping weight on (I’ve never been thusly afflicted).

A second problem is that affixing your goals to a benchmark tends not to be aspirational. The goals we set should represent a tension between the people we are today and the people we hope to become. When we use an average like the benchmark for setting our financial goals, we are settling in a very real sense. No one sets out to live an average life. We don’t dream of average happiness, average fulfillment or an average marriage, so why should we settle for an average investment?

The bulk of my current work is around addressing the irrationality of using everyone else as your financial North Star. Through a deep understanding of your personal needs, your advisor should be able to create a benchmark that is meaningful to you and your specific financial needs. After all, you have not gotten to where you are today by being average. Isn’t it time your portfolio reflected that?

Views expressed are for illustrative purposes only. The information was created and supplied by Dr. Daniel Crosby of IncBlot Behavioral Finance, an unaffiliated third party. Brinker Capital Inc., a Registered Investment Advisor