Are you worrying about the wrong things?

Crosby_2015-150x150Dr. Daniel Crosby Executive Director, The Center for Outcomes & Founder, Nocturne Capital

Take a moment and imagine the person you love the most. Perhaps it’s your spouse or partner; maybe it’s a beloved parent. If that person is near, I’d like for you to put the phone or tablet down and go give them a big hug. Tell them how much you appreciate them and all the reasons why you love them. If they aren’t proximal, say a small prayer of thanks or think good thoughts about the positive impact they have in your life before you return to reading. Go on…

…You back now? Ok, great, welcome back.

Now, I want you to realize that the person you’ve just spent the last few minutes idolizing is more likely to kill you than any stranger, terrorist, or bogeyman. In fact, your appendix is more likely to off you than Al Qaida or ISIS. We tend to fear all the wrong things. We’re scared of high-profile, low probability threats like terrorist attacks and home invasions, but we routinely ignore more mundane but probabilistic hazards like not wearing a seatbelt or eating unhealthily. In general, we stink at assessing risk in many predictable ways – chief among them is our tendency to worry disproportionately about low-probability-high-salience events.

Quick! Name all the words you can that begin with the letter “K.” Go on, I’m not listening. How many were you able to come up with? 

Now, name all the words you can in which K is the third letter. How many could you name this time?

If you are like most people, you found it easier to generate a list of words that begin with K; the words probably came to you more quickly and were more plentiful in number. But, did you know that there are three times as many words in which K is the third letter than there are that start with K? If that’s the case, why is it so much easier to create a list of words that start with K?

It turns out that our mind’s retrieval process is far from perfect, and a number of biases play into our ability to recall. Psychologists call this fallibility in your memory retrieval mechanism the “availability heuristic,” which simply means that we predict the likelihood of an event based on things we can easily call to mind. Unfortunately for us, the imperfections of the availability heuristic are hard at work as we attempt to gauge the riskiness of different ways of living.

In addition to having a memory better suited to recall things at the beginning and the end of a list, we are also better able to envision things that are scary. I know this first hand. Roughly six years ago, I moved to the North Shore of Hawaii along with my wife for a six-month internship. Although our lodging was humble, we were thrilled to be together in paradise and eager to immerse ourselves in all the local culture and natural beauty it had to offer. That is, until I watched “Shark Week.”

For the uninitiated, “Shark Week” is the Discovery Channel’s seven-day documentary programming binge featuring all things finned and scary. A typical program begins by detailing sharks’ predatory powers, refined over eons of evolution, as they are brought to bear on the lives of some unlucky surfers. As the show nears its end, the narrator typically makes the requisite plea for appreciating these noble beasts, a message that has inevitably been over- ridden by the previous 60 minutes of fear mongering.

For one week straight, I sat transfixed by the accounts of one-legged surfers undeterred by their ill fortune (“Gotta get back on the board, dude”) and waders who had narrowly escaped with their lives. Heretofore an excellent swimmer and ocean lover, I resolved at the end of that week that I would not set foot in Hawaiian waters. And indeed, I did not. So, traumatized was I by the availability of bad news that I found myself unable to muster the courage to snorkel, dive or do any of the other activities I had so looked forward to just a week ago.

In reality, the chance of a shark attacking me was virtually nonexistent. The odds of me getting away with murder (about 1 in 2), being made a Saint (about 1 in 20 million) and having my pajamas catch fire (about 1 in 30 million), were all exponentially greater than me being bitten by a shark (about 1 in 300 million). My perception of risk was warped wildly by my choice to watch a program that played on human fear for ratings and my actions played out accordingly.

The easy availability of financial news (especially the scary kind) paired with the human tendency to overweight danger means that many investors walk around in a state of near-panic all the time. All the while, they are ignoring things that are truly damaging wealth over time like bad behavior, excessive fees, a lack of diversification and inadequate savings. It is only by understanding how our brains can play tricks that we truly grasp that panic selling is more hazardous than a recession just as surely as a hamburger can be more harmful than a shark.

The Center for Outcomes, powered by Brinker Capital, has prepared a system to help advisors employ the value of behavioral alpha across all aspects of their work – from business development to client service and retention. To learn more about The Center for Outcomes and Brinker Capital, call us at 800-333-4573.

The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Brinker Capital, Inc., a Registered Investment Advisor.

 

Diversification: The power of winning by not losing

Crosby_2015Dr. Daniel Crosby, Executive Director, The Center for Outcomes & Founder, Nocturne Capital 

The image is indelibly etched in the mind of baseball fans everywhere. In 1988, an injury-hobbled Kirk Gibson, sick with a stomach virus to boot, limp-running around second base and pumping his fist. Without a doubt, Gibby’s homerun is one of the most memorable in baseball history, setting up the Dodgers for an improbable Game One “W” and eventual World Series win. But in remembering the heroics of the moment, we tend to forget all that came before.

The score at the time of Gibson’s unexpected plate appearance was 4 to 3 in favor of the Oakland Athletics, whose mulleted (and we now know, steroid-fueled) superstar Jose Canseco had hit a grand slam in the first inning. Canseco had an outstanding year in 1988, hitting .307 with 42 homeruns, 124 RBIs and, eye-popping by today’s standards, 40 stolen bases. Loading the bases in front of Canseco was massively risky as was throwing him the hanging slider that he eventually parked over the center field fence. But riskier still was sending Gibson to bat sick with the flu and hobbled by injuries sustained in the NLCS. That we don’t perceive it as risky is an example of what psychologists call “counterfactual thinking.” It turned out in the Dodgers favor, so Tommy Lasorda is viewed as a strategic genius. But had it not, and simple statistics tell us that getting a hit is never in even the best hitter’s favor, Lasorda would have been a goat.

Just as we laud improbable and memorable athletic achievements without adequately accounting for risk and counterfactuals, we do likewise with large and singular financial events. Paulson’s shorting of subprime mortgage products. Soros shorting $10 billion in currency. These events are so large, so memorable and worked out so favorably that we ascribe to them a level of prescience that may not actually correspond with the expected level of risk-adjusted return. A friend of mine once joked that, “every man thinks he is ten sit-ups away from being Brad Pitt.” Having observed significant overconfidence among both professionals and novice traders alike, I might similarly assert that “every stock market enthusiast thinks that (s)he is one trade away from being George Soros.” The good fun we can have talking about, “The Greatest Trade of All Time” notwithstanding, most real wealth is accumulated by not losing rather than winning in spectacular fashion.

Diversification.Power of Winning by not Losing

The danger in taking excessively risky bets with the hope of a spectacular win is best illustrated by what is formally known as variance drain. Variance drain is the difference between mean return and compound return over a period of time due to the variability of periodic returns. The greater the variability from peak to trough, the more the expected returns will deviate negatively. Confused?

Say you invest $100,000 each in two products that both average ten percent returns per year, one with great volatility and the other with managed volatility. The managed volatility money rises 10% for each of two years, yielding a final result of $121,000. The more volatile investment returns -20% in year one and a whopping 40% in year two, also resulting in a similar 10% average yearly gain. The good news is that you can brag to your golf buddies about having achieved a 40% return – you are the Kirk Gibson of the market! The bad news, however, is that your investment will sit at a mere $112,000, fully $9,000 less than your investment in the less volatile investment since your gains compounded off lower lows.

A second, behavioral implication of volatile holdings is that the ride is harder to bear for loss-averse investors (hint: that means you and everyone you know). As volatility increases, so too does the chance of a paper loss which is likely to decrease holding periods and increase trading behavior, both of which are correlated with decreased returns. Baseball fans know the frustration of watching their favorite player “swing for the fences”, trying to end the game with a single stroke of the bat, when a single would do. Warren Buffett’s first rule of investing is to never lose money. His second rule? Never forget the first rule. The Oracle of Omaha understands both the financial and behavioral ruin that come from taking oversized risk, and more importantly, the power of winning by not losing.

The Center for Outcomes, powered by Brinker Capital, has prepared a system to help advisors employ the value of behavioral alpha across all aspects of their work – from business development to client service and retention. To learn more about The Center for Outcomes and Brinker Capital, call us at 800-333-4573.

The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Brinker Capital, Inc., a Registered Investment Advisor.

 

Synthesizing happiness

Crosby_2015Dr. Daniel Crosby, Executive Director, The Center for Outcomes & Founder, Nocturne Capital

On Wednesday, November 9, approximately half of Americans will wake up disappointed. Regardless of which candidate prevails on Election Day, roughly fifty percent of the people that she or he will eventually lead will have voted against them. Those whose preferences were not realized will likely begin a new offensive; painting a dystopian picture of the world to come with President X at the helm. Similar to what John Coyne mentioned on Monday. Markets will crash. Businesses will fail. Wars will rage. The historical precedent is that all of this and more will be the new rallying cry of the vanquished party and it’s easy to imagine that it will only be exacerbated by the ugliness and division that have characterized this contest.

But there is another, more powerful precedent that will have a far greater impact on financial markets than who wins or loses: it is our tendency toward resiliency that exceeds our own expectations.

Imagine I asked you to consider your ability to function in the face of the unthinkable – the passing of a child or partner, a debilitating illness, the loss of a job. Odds are, you would describe yourself as helpless, heartbroken and unable to go on. And while all of the scenarios I’ve just put forth are truly tragic, research suggests that our ability to cope with disappointment and loss are greater than we realize until we are thrust into a moment of trial.

To demonstrate this, I’d like for you to consider two groups that seemingly have little in common – paraplegics and lottery winners. If I asked you whether you would be happier one year out from winning the lottery as Option A and becoming disabled as Option B, you would likely suggest that I was in need of a psychologist rather than being trained as a psychologist. Obviously, we would all hypothesize that one year after the life changing event, lottery winners would be much happier and paraplegics would be much sadder, right? But this is simply not the case.

One year after their respective events, it makes little difference whether you are riding in a Bentley or a wheelchair – happiness levels remain relatively static. So, why is this? We tend to overpredict the impact of external events on our happiness. One year later, paraplegics have found out their accidents were not as catastrophic as they may have feared and have coped accordingly. Similarly, lottery winners have found out that having money brings with it a variety of complications. No amount of spending can take away some of the tough things life throws at each and every one of us. As the saying goes, “wherever you go, there you are.” In much the same way, we tend to project forward to a hypothesized happier time, when we have more money in the bank or are making a bigger salary. The fact of the matter is, when that day arrives, we are unlikely to recognize it and will simply project forward once again, hoping in vain that something outside of ourselves will come and make it all better. Our dreams and our nightmares are never quite as likely as we might assume in the moment and our ability to cope with difficulty as it arrives is far greater than we realize before being tested.

I’m not suggesting that the coming years will be easy, far from it. Humanity’s default setting seems to include plenty of divisiveness and struggle right alongside the moments of altruism. I’m simply suggesting that whatever comes, we, and the institutions that support us, are more capable of coping than we may now realize. Always pithy in his perspective, Warren Buffett 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.”

The future may be in doubt but our resolve is not. It has never paid to bet against America and I wouldn’t start now, no matter who is at the helm.

The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Brinker Capital, Inc., a Registered Investment Advisor.

Another Day, Another Panic. Time To Get To Work

Crosby_2015Dr. Daniel Crosby, Executive Director, The Center for Outcomes & Founder, Nocturne Capital

Earlier this year it was trouble in China, today brings unrest in the United Kingdom, and you can bet that we won’t make it through the rest of this (or any other) year without volatility, uncertainty and worry. At times like this, advisors can become frustrated that the messages of patience and discipline that they teach their clients can be so roundly forgotten. But although it may be natural to despair, financial advisors would do well to remember that it is times like these for which clients enlist their services. Times of fear. Times of uncertainty. Times when they are very likely to do irreparable harm to their portfolios.

The sad fact about human nature is that knowledge counts for very little when we need it most. Dan Ariely has shown that while almost any adult can expound the basics of safe sex, knowledge tends to be overridden by emotion in a moment of passion. Likewise, dieters fail not because they cannot discern which foods are healthy and which are not, but because a doughnut is more soothing than a celery stick on a tough day. And so it goes with the clients of financial advisors who have worked hard to educate their clients about the fundaments of diversification, consistency and perseverance. Your clients likely know exactly what they should be doing, but in a moment like this, they need you to be at your persuasive best to convince them to follow rules they already know to be true.

The Knowing-Doing Gap

My route home from work typically takes me over a winding, hilly pass that is the perfect way to decompress after a long day in the office. Like most of us, I usually drive home more or less unconsciously, but I was recently broken from my trance by a tanker spill that obscured all four lanes of traffic. Searching for a new route, I found myself by the nearest hospital, the largest in the area and an institution with a fine track record.

Passing now between the two main buildings and the monorail that connects them, I saw something most unexpected. There, on a nearby lot, were 13 medical professionals in scrubs – smoking. Doctors and nurses! People who would, upon extinguishing their cigarettes, return to the building and plead with their sick patients to stop smoking. I can say with near-certainty that every one of those 13 professionals knew better and yet they couldn’t help themselves. The official name for this phenomenon is the “knowing-doing gap”, and its effects are powerful and pervasive.

James Choi of Yale found that only 4% of people who wanted to save more actually ended up increasing their savings rates. This sad number was made only slightly less pitiful when would-be-savers made a written plan; 14% were then able to stick with the program. Similarly disheartening is that 30% of medical prescriptions go entirely unfilled and of those that are filled, just over half are taken according to their dosage. In other words, among people who proactively seek out a doctor’s medical advice, most of them do not take it. How then can we as advisors ensure that clients are not only receiving good advice but that they are doing so in a manner that will persuade them to follow the received wisdom?

The Four Ps of Influential Communication

At The Center for Outcomes, we believe in the power of financial advice. We have frequently cited the work of organizations as diverse as Aon Hewitt, Morningstar, Envestnet and Vanguard—all of whom have found that clients that work with a financial advisor handily outperform those who do not. But if good financial advice is capable of adding great value, the persuasive powers of an advisor serve as the ceiling for that value. It is with this in mind that we have created our Persuasive Communication Model. Advisors who attend our two-day seminar receive extensive training in the theory and application of the model, so what follows here is a very brief introduction that lacks the appropriate background. Nevertheless, it is our hope that the skeleton of this model will provide a useful template for you as you have tough conversations with your clients. The four Ps are:

  • Purpose
  • Proof
  • People
  • Process

Purpose – Leading with “why?”

It is human nature to look for and create meaning, and we are far more compelled to act (or not act, in this case) when we understand the reasons behind the behavior. Practically speaking, this means reminding clients of their values and the goals they are trying to meet, both of which would be disrupted by acting in haste.

  • Research says: Karlan, et al. (2010) found that simply reminding people of their previous commitment to act in a certain way increased compliance by 16%.
  • Sample dialogue: “Mr. Smith, you engaged me to help you send your two daughters to college and to retire comfortably with your partner, so I’d like to frame my comments today in terms of how impulsive action might negatively impact your stated goals.”

Proof – Showing expertise

It is understandable that in times of unrest, people want to know that they are being shepherded by a knowledgeable guide. Having now framed the conversation in terms of the client’s values, it is time to show that you are a subject matter expert.

  • Research says: In his excellent book, “Your Money and Your Brain”, Jason Zweig points out that the part of the brain associated with critical thinking actually goes to sleep when someone is listening to someone they perceive to be a financial expert. You quite literally give your clients peace of mind.
  • Sample dialogue: “Your desire to get conservative is understandable from an emotional perspective in light of the recent upheaval. Unfortunately, it’s not consistent with best practices around building wealth. In a study aptly titled, ‘Trading is Hazardous to Your Wealth’, Drs. Terrance Odean and Brad Barber found that the more active someone was in entering and exiting the market, the worse their outcomes tended to be.”

People – Peer pressure for good

As financial professionals, we have a deep understanding of the negative impact of “herding” or the tendency to let the crowd influence our investment decisions. What is less appreciate is that social proof (or peer pressure if you like) is actually a powerful tool in our efforts to influence behavior.

  • Research says: Online shoppers are 63% more likely to make a purchase if it has received positive reviews from their peers.
  • Sample dialogue: Social proof can be demonstrated at the institutional, individual expert, peer and personal level. Dialogue here might draw on research from a vaunted college or other institution, followed by the research of a well-known Nobel Prize winner and concluded with a personal testimonial of why you think the proposed action is best.

Process – Guide, don’t overwhelm

Having now explained the why, what and who of your approach, it is time to talk about how to proceed. Remember, your client is overwhelmed and fearful and the last thing they need is to have their life further complicated.

  • Research says: Fewer choices equal greater action in everything from grocery store samples to 401(k) options. Present two, equally positive options, thereby giving your client a stake in the process but without overwhelming them.
  • Sample dialogue: “As I hope you now see, taking drastic action is inconsistent with your financial goals and the research on best investment practices. That said, I want you to sleep well tonight. As I see it, there are two possible moves we could make. The first would be to do nothing at all, leaving your existing allocations intact and checking in with me as needed to remain calm. A second option would be to move a small percentage of your assets to a “Safety” bucket that would provide for you and your family for 2 years in the event of further volatility. This would allow you to have immediate peace of mind without unduly disrupting our well-thought-out process. What are your thoughts on these two options?”

The work that you do as a financial advisor has a meaningful impact on the lives of the people you serve, but you face an uphill battle. No matter how well-educated and knowledgeable your clients may be, instinctual behavioral urges push them to make poor decisions at precisely the time when they are the most damaging. By utilizing The Center for Outcomes Persuasive Communication Model, it is our hope that you will become even better at the part of your job that research suggests adds the most value – managing clients’ behavior. For a much deeper understanding of how this model can revolutionize your practice, please be in touch.

Sources:
http://www.theatlantic.com/health/archive/2012/09/the-289-billion-cost-of-medication-noncompliance-and-what-to-do-about-it/262222/

http://www.thinkadvisor.com/2016/02/01/why-clients-dont-take-your-advice?slreturn=1466788772&page=3

https://www.amazon.com/Your-Money-Brain-Science-Neuroeconomics/dp/0743276698

http://faculty.haas.berkeley.edu/odean/papers%20current%20versions/individual_investor_performance_final.pdf

https://www.searchenginejournal.com/the-power-of-social%C2%A0proof/21896/

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. Brinker Capital, Inc., a Registered Investment Advisor.

Stress Contagion, the DOL and You

Crosby_2015Dr. Daniel Crosby, Executive Director, The Center for Outcomes & Founder, Nocturne Capital

Yawn.

YAWN.

Yaaaaaawwwwwwn.

Are you yawning after reading this? I’m fighting back the urge myself after writing the word three times—what gives? The answer to this extreme suggestibility lies with what scientists call mirror neurons—neurons that fire when an action is being performed and when that same action is being observed. The original discovery of mirror neurons took place in a sleepy, somewhat overlooked research lab in Parma, Italy. Scientists there were studying the brains of macaque monkeys in an effort to understand how the brain organizes motor behavior. As Martin Lindstrom explains, the scientists quickly discovered some things that challenged their assumptions about how the brain works:

“They observed that the macaques’ pre-motor neurons would light up not just when the monkeys reached for that nut, but also when they saw other monkeys reaching for a nut.” (Buyology)

Whether an action was performed by the monkey or merely observed, the effect on the brain was identical.

Stranger still was what they observed one sweltering afternoon when a graduate student on the team entered the lab with an ice cream cone. One of the monkeys, still hooked up to the monitoring apparatus, was staring greedily at the frosty treat. As the student brought the ice cream closer for a lick, the macaque’s pre-motor region began lighting up the screen:

“It hadn’t moved its arm or taken a lick of ice cream; it wasn’t even holding anything at all. But simply by observing the student bringing the ice cream cone to his mouth, the monkey’s brain had mentally imitated the very same gesture.” (Buyology)

shutterstock_153551429Mirror neurons are the reason why you cry in a sad movie, cringe at the sight of someone else eating something gross, or close your eyes when the chainsaw-wielding local stumbles upon the unsuspecting group of college kids at the lake house. Mirror neurons are why “unboxing” videos exist (seriously, it’s a thing), because it’s nearly as fun to watch someone else open a new gaming system or expensive toy as it is to do it ourselves. To truly apply this learning, give your children a video of other children opening presents at their next birthday party and tell them Dr. Crosby told you it’s more or less the same thing!

At this point you as a financial advisor may be thinking, “this all makes sense” and simultaneously wondering, “what does this have to do with me and my work?” It has been my anecdotal experience that just as married couples tend to resemble one another over time, the clients of financial advisors tend to behave much like the advisors with whom they work.

There may be some self-selection at work here but even more powerful are the cues that clients take from their advisors with each interaction. If your office has CNBC on loop and is stockpiled with magazines devoted to the hot stocks du jour, don’t be surprised when clients lead with griping about performance instead of sticking to their plan. Likewise, if you telegraph panic and are prone to complaining about politics and capital markets, don’t be surprised when your own fears land on your doorstop in the form of hand-wringing clients.

shutterstock_108406256The DOL’s “conflicts of interest” rule was announced yesterday, and with that will come the questions and uncertainty inherent in any new piece of legislation. Bearing in mind the concept of stress contagion, I would encourage you to consider the ways in which your clients will look to you as a leader and follow your example when sifting through their own feelings about this legislation in general and your value to them in specific. Change, it would seem, is coming, but one of the core beliefs of The Center for Outcomes is that periods of disruption provide opportunities for differentiation for the truly prepared. Whatever changes may come, your value to your clients and your position as a leader are steadfast and must be positioned as such.

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. Brinker Capital, Inc., a Registered Investment Advisor.

Five Answers for the Voices in Your Head

Crosby_2015Dr. Daniel Crosby, Executive Director, The Center for Outcomes

Many investors are waking up this morning to the unsettling realization that trading was halted in China last night after another precipitous market drop. When paired with rumors of hydrogen bomb testing in North Korea, the recent acts of domestic terrorism and a long-in-the-tooth bull market, it can all be a little frightening and overwhelming.

It’s at a time like this that it’s best to temper the catastrophic voices in our head with some research-based truths about how financial markets work.

For each of the rash, fear-induced common thoughts below (in bold), we have countered with a dose of realism:

“It’s been a good run, but it’s time to get out.”
From 1926 to 1997, the worst market outcome at any one year was pretty scary, -43.3%; but consider how time changes the equation—the worst return of any 25-year period was 5.9% annualized. Take it from the Rolling Stones: “Time is on my side, yes it is.”

“I can’t just stand here!”
In his book, What Investors Really Want, behavioral economist Meir Statman cites research from Sweden showing that the heaviest traders lose 4% of their account value each year. Across 19 major stock exchanges, investors who made frequent changes trailed buy-and-hold investors by 1.5% a year. Your New Year’s resolution may be to be more active in 2016, but that shouldn’t apply to the market.

“If I time this just right…”
As Ben Carlson relates in A Wealth of Common Sense, “A study performed by the Federal Reserve…looked at mutual fund inflows and outflows over nearly 30 years from 1984 to 2012. Predictably, they found that most investors poured money into the markets after large gains and pulled money out after sustaining losses—a buy high, sell low debacle of a strategy.” Everyone knows to buy low and sell high, but very few put it into practice. Will you?

“I don’t want to bother my advisor.”
Vanguard’s Advisor’s Alpha study did an excellent job of quantifying the value added (in basis points) of many of the common activities performed by an advisor, and the results may surprise you. They found that the greatest value provided by an advisor was behavioral coaching, which added 150 bps per year, far greater than any other activity. At times like this is why investors have advisors so don’t be afraid to call them for advice and support.

“THIS IS THE END OF THE WORLD!”
Since 1928, the U.S. economy has been in recession about 20% of the time and has still managed to compound wealth at a dramatic clip. What’s more, we have never gone more than ten years at any time without at least one recession. Now, we are not currently in a recession, but you could expect between 10 and 15 in your lifetime. The sooner you can reconcile yourself to the inevitability of volatility, the faster you will be able to take advantage of all the good that markets do.

Brinker Capital understands that investing for the long-term can be daunting, especially during a time like this, but we are focused on providing investment solutions, like the Personal Benchmark program, that help investors manage the emotions of investing to achieve their unique financial goals.

For more of what not to do during times of market volatility, click here.

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. Brinker Capital, Inc., a Registered Investment Advisor.

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