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Amid a time of nearly unprecedented market volatility generated by the COVID-19 outbreak, investors are fleeing long-held positions in their portfolios, selling stocks with the hope of mitigating future losses. Animal spirits, a concept made famous by legendary economist John Maynard Keynes during the aftermath of the Great Depression, have taken hold as American and global investors alike grapple with some of the most volatile financial markets since the financial crisis of 2008.

CERTIFIED FINANCIAL PLANNER professionals and the solid financial advice they give their clients represent the antidote to these value-destructive, fear-based ‘animal spirits.’

The advice of a CFP® professional has never been more critical, which is why we asked several of our CFP Board Ambassadors to offer their insights on what financial planners should focus on when helping their clients through this period of uncertainty.

Here’s what they had to say.

Remind Clients to Stick to Their Long-term Financial Plan

Many investors (many of whom are clients of CFP® professionals) are justifiably skittish about the current level of volatility in the market and how that is impacting their savings, often prompting them to pull money to mitigate losses. However, one of the best things a CFP® professional can do is ensure their clients stick to their financial plan.

“‘Don’t make rash, short-term decisions about your long-term financial planning’ is the number-one thing you should be telling your clients right now,” says Marvin (Marty) Reid, CFP®, president of Reid Financial Consulting, Inc.

Elaine King, CFP®, founder of the Family & Money Matters Institute™, in an article for Business Insider, writes that she’s telling her clients to make investment decisions that they will feel good looking back on in three years.

“It's hard to offer universal advice, but I've been telling my clients to picture their lives in 2023 and imagine if the decisions they make today will feel OK three years from now,” writes King. “It helps to imagine the decision in three years because, like the COVID-19 virus curve, over time, the volatility of the falling market will flatten. You're asking yourself this question to try to understand what you can tolerate now and what will give you more financial peace in the meantime.”

Similar advice to view today’s actions from a long perspective comes from David Zuckerman, CFP®, principal at Zuckerman Capital Management, who said when faced with turbulent times, there are two specific questions a CFP® professional should have their clients ask themselves before making any major investment decisions.

"‘Is the action I'm considering going to help or hurt my long-term odds of success?’ and ‘If I take an action that turns out to be a mistake, is this a mistake I can afford to make?’"

Lots of Discount Opportunity, but Prudence Is Key

While many retail investors will be running to the hills in the face of this volatility, there are those who will actively look to take advantage of discounted assets they can add to their portfolio, a sentiment which has been echoed by financial planners.

“You could also consider investing more now while shares are ‘on sale’ — your investment may grow exponentially in value over time,” writes Marguerita Cheng, CFP®, CEO of Blue Ocean Global Wealth, in a recent article for Business Insider.

“If you are fortunate enough to be able to continue to make contributions into your retirement plans, keep a well-diversified portfolio. You are certainly in a position to take advantage of the conditions of the current market,” Reid adds when speaking about opportunities presented to investors by the current market downswing.

However, Reid cautions that clients often need reminders to act in moderation. Rather than dive in head-first, as some clients may feel pressured to do, Reid’s firm advocates an incremental approach to buying into this weakness in the market.

“It’s about taking advantage of the value that’s out there but being selective in the process.”

Emotions Are More Difficult to Manage than Investments

Fear, one of the most basic ‘animal spirits’ that drives investment decisions in times of volatility is a powerful motivator, particularly the fear of losing money.

“The fear of loss can cause paralysis or, more often than not, an overreaction leading to a sell-off,” Zuckerman said. “Research indicates that loss is twice as powerful a motivator as gains, so it's no surprise to see the market fall much faster than it rises.”

He suggests understanding investor psychology can provide financial advisors a unique insight into the decision-making process during turbulent times.

Emotionally based investing can lead to financial ruin. “Don’t make decisions based on fear,” writes Cheng about what she cautions her clients against. “Your emotions should never drive your financial decision making.”

CFP® professionals can play a role in counseling clients and helping them talk through what they are experiencing emotionally, according to Reid.

These times generate a lot of stress for the individual investor. It’s really important, particularly if someone is working with a financial advisor, that they try to get some objectivity about our current environment and what the market is providing. Oftentimes, it’s more difficult for us to manage our emotions than it is to manage our investments.”

Reid offered an anecdote from his personal life that demonstrates the irrational behavior driven by with ‘animal spirits’: “A colleague of my wife, who is nearing retirement but is still a few years away and still working, decided to put all of her 401(k) in cash. This is precisely the kind of behavior that financial planners are designed to curb and why our jobs are so necessary right now.”

Ultimately, helping clients combat emotion-driven investment decisions by understanding the behavioral biases that run counter to successful investing is one of the most important aspects of a CFP® professional's practice, Zuckerman says.

“Remaining grounded in objectivity, statistics and probabilities of success is rarely easy during chaotic times, but it's when a CFP® professional’s expertise can matter the most.”

Key Takeaways

  • Remind Clients to Stay Committed to Their Financial Plans
  • Listening and Counseling Come First, Financial Advice Second
  • When Applicable, Encourage Opportunistic Buying but with Moderation.

This article was originally published on LinkedIn on April 7, 2020.

Read on LinkedIn

About the Author: Kevin Keller, CAE is Chief Executive Officer of CFP Board. CFP Board’s mission is to benefit the public by granting the CFP® certification and upholding it as the recognized standard of excellence for competent and ethical personal financial planning.