Ever wondered why, despite knowing better, so many investors still sell when the markets and dip and buy when they rise? It’s all part of being human, writes Hester van der Merwe, CFP®, but luckily you can coach your way out of it.
Most people know that time in the market is an essential element to investment success. And we’re equally aware that there’s no shortage of seasoned experts who can design brilliant investment strategies that are tailor-made to fit our unique needs and objectives. So why do we still see investors pulling funds of out of the market at a downturn, in the process turning a paper loss into an actual capital loss? Worse still, these same investors often come flooding back after the recovery, entering the market at a much higher point than the previous exit. On the face of it this phenomenon makes no sense. Or does it?
For decades the focus of investment theory has been on the technical aspect of investment plans. Some very clever people across the world have hugely advanced our understanding of what makes the markets tick. But still the vicious cycle of jumping in and out of the market at exactly the wrong time continues…
To err is human
The answer, of course lies in the fact that we, as investors, remain human. And, despite what we like to think about ourselves, humans do not make decisions based on facts and technical analysis. All high-level thinking involves the part of our brain known as the pre-frontal cortex. These functions include making considerate decisions, being flexible and displaying good judgement…All absolutely vital when making important investment decisions!
Professor Amy Arnsten of the Yale School of Medicine calls our pre-frontal cortex the ‘Goldilocks of our brains’ – everything has to be just right for it to function optimally. Add to this research presented by financial transitionist, Susan Bradley, CFP® that shows that up to 70% of our decision making happens on the emotional side of our brains and you should have a much clearer idea of why even the best investment strategies sometimes fail to deliver.
It is now abundantly clear that long-maligned “softer issues” need to be taken off the financial planning backburner and accorded the recognition they so desperately warrant. This all sounds good and well, but how can it be applied in practice? The answer is simple: Investors need to get used to the idea of working with a qualified financial coach.
Teach a man to fish
A financial coach is not a therapist, mentor or counsellor. The aim of financial coaching is to enable you to get acquainted with your own money story and learn where your blind spots are. Ultimately, it’s all about appreciating how your core beliefs shape your worldview and your interactions with both the people – and money – around you.
As with anything genuinely worthwhile, you’ll have to put some time into coaching to see rewards. But it is oh so worth it. In a matter of months, a skilled coach can teach your more about investing than a traditional financial planner could manage in a lifetime. As with all learning, what happens outside of the ‘classroom’ is just as important as what goes on inside it. Great coaching empowers you to self-correct…To ride out that market crash because you’ve learnt to ignore the emotional bias which urges you to sell at precisely the wrong time. The insights and learning that come to the investor in-between sessions add as much value as the coaching sessions themselves.
Through financial coaching you will gain new insights into your own behaviours, thus enabling change from the inside. Compare this to a situation where an adviser simply tells an investor what to do and you’ve got the difference between giving someone a fish and teaching them to fish. No matter how stellar the financial plan and investment strategy, telling simply cannot compare to teaching.
Not so fast
But don’t get me wrong. A financial planner must never abandon being an expert in favour of becoming a coach. Technical proficiency is as important as ever and that stellar financial plan and investment strategy we referenced earlier can never be supplanted. The inordinate power of financial coaching lies in enabling an investor (that’s you) to appreciate what following your tailormade investment strategy opens up for you…And to understand what deviating from it closes down.
Even in these incredibly uncertain times, it is no longer enough to ask whether an investment strategy will stand the test of time. Modern financial planners must ask themselves how well they have equipped their clients to understand their relationship with money. The answer will often lie in how fully the financial planner has embraced coaching.