Managing a portfolio can be fun and exciting until it’s not. Retail investment clients begin investing with the hope of beating the benchmark. They dream of producing better returns than the average investor and creating an affluent lifestyle. The excitement of researching and selecting securities for their portfolio causes adrenaline and other reward producing chemicals to course through their bodies. They diligently, almost obsessively, watch the markets and continue to buy or sell securities based on their knowledge and luck. Over time, however, the economic, political, and market conditions begin to change. Volatility enters the scene. The retail investor begins to question their selections. The doubtful client attempts to re-orient the account. Worry and concern pierce through their confidence as they watch their decisions diminish their portfolio returns. Panic sets in and you know what happens next…the retail investor self-destructs. The result is a loss in the portfolio.
When regret sets into a client, it can be hard for an investment consultant to coach and guide them back into a conversation. It can be twice the challenge to talk about investing or suggest that it may be time to hire a professional advisor.
Facts about investment regret:
- Investment mistakes can raise the client’s emotional state and cause them to freeze their decision making. The immediate reaction is surprising, which penetrates the reflexive brain much like a startle response.
- Regret is felt if the outcome is deemed to have been caused directly by the client’s actions. There were alternative options available, or a “win” that shifted to a loss while under the client’s watch.
- Regret, if left to itself, can turn into bitterness and a cyclical pattern of should-of, could-of, would of.
Here are five steps to help move your client toward healthy decision making:
1. Reduce the number of choices available to your client
Paralysis of decision making can occur when there are way too many options to choose from. As the menu grows, the less likely an investor will choose one of them. Instead, consider the needs of the client and select the few opportunities that closely align with your investor’s goals and values. If an investor doesn’t have the skills to create a great portfolio, consider a third-party advisor.
2. Create a sense of a “limited-time offer”
This statement doesn’t mean the consultant should enter into sales mode. Establish a limited time frame for resolution making. If you’re planning to refer a client to a third-party advisor, suggest the advisor is in the area for a short period. If you have the best service offering in-house, be selective in the number of investment models presented. When it comes to regret, less is more.
3. Focus the client’s attention on the positive aspects of the portfolio
Most likely, your client made one or two good decisions in the portfolio before regret saturated his mind. Move away from regret, focus on opportunities that resulted from the mistake, and attempt to move them forward in their decisions. Regretful people tend to regurgitate past decisions, but a comparison of ‘what is’ vs. ‘what was’ in the portfolio may further paralyze your client. Focus him forward rather than allowing him to delve into comparing past decisions.
4. Remind your investor that everyone makes investment mistakes
There is no such thing as perfect investing. As much as we all try to produce exceptional results, there has yet to be a reproducible formula for investment selection perfection. It’s normal to make errors; it’s critical to learn from them and let them go.
5. Re-introduce the options
Lastly, if your client requires all of the above steps, then the final nudge to the investor is to remind them of the choices they have in moving forward. If your client doesn’t respond, he or she may need more time to think things over before they can re-engage. Simply wait, and the next time you call, start the process over again.
People have to choose action over inaction. As an investment consultant, you can give your client the opportunity to step forward. You can continue to open up conversations that promote sound decision making. However, no one can force a person to leave regret behind.
- Zweig, Jason. (2007). Your Money and Your Brain. Simon and Schuster. Chapter 9
- Sung, S. (2007). The Effect of Pride and Regret on Investor’s Trading Behavior. https://repository.upenn.edu/cgi/viewcontent.cgi?article=1043&context=wharton_research_scholars
- Stenner, T. (2014). Let It Go: Learn to Live with Investment Regret. https://www.theglobeandmail.com/globe-investor/investment-ideas/let-it-go-learn-to-live-with-investment-regret/article18917000/