3 ways to help clients avoid investing mistakes

By Morningstar |  23-12-19 | 

Your clients face various biases like overconfidence, confirmation, recency, disposition effect, present bias and choice paralysis.

How can you help your clients overcome these challenges? The key is to remember that it’s how we’re wired.  Everyone—no matter how smart you are.

We can’t overcome these problems by force of will; instead, we have to remove our human frailties from the equation, or put tremendous time and energy into avoiding these mistakes.

Here are three basic strategies for avoiding these common mistakes.

1. Dedicate Your Entire Life to Investing (and Psychology)

Great valuation-driven investors (Buffett, Munger, Graham, etc.) show that this is possible. But these people not only dedicate their lives to it; they hire teams of others, gather extensive data, and buy specialized  analytical software.

If you (and your clients) want to go down that route—great! But most individual investors just want to dabble, not live and breathe investing. Watching the news or reading the papers give individuals the illusion of special insight or information—but they’ll usually be crushed by people who devote their lives to the process.

2. Outsource

Many investors realize the limitations they face and turn to third parties for help. In a poll of investors, roughly half of Americans who invest had consulted with professional advisers.

That’s because advisers are more likely to be the valuation-driven professionals. They’re also more likely to study investor psychology and strategies to help their clients overcome behavioural challenges.

3. Keep It Simple and Use Autopilot

Our minds will take shortcuts, no matter what we do. One way to avoid this is to stop thinking and go with  simple passive strategies. Many retirement plans do this—they help make saving and investing in appropriate vehicles automatic.

This autopilot, though, contains two challenges. First, if investors overreact during market volatility and change or remove their investments, it’s meaningless. Second, autopilots don’t consider whether investors really need to re-engage—like when participants in a retirement plan change jobs.

Download this practical guide to understand your client needs better and help them overcome behavioural obstacles.

Add a Comment
Please login or register to post a comment.
Mutual Fund Tools