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How Can Advisors Help Clients Through Market Anxiety?

Our research explored three tactics for dissuading client fears about increased volatility.

The market volatility in the second half of 2020 can make even the most seasoned of investors cautious.

Hesitation to trade during a downturn, however, creates an interesting dilemma: Investors are afraid to lose money, yet downturns can provide great opportunities to buy stocks at a discount. So, how can advisors help their clients calmly and thoughtfully evaluate when to buy? We believe that proper framing–how advisors describe a situation–can play a beneficial role.

In our paper, "3 Paths Through Market Anxiety," we studied the efficacy of a few different framing techniques. (Morningstar Office and Direct clients can download the paper here.)

3 Approaches to Calming Investors' Market Anxiety In our experiment, we sought to understand how market downturns can affect investors' decision-making. Specifically, we were interested in whether particular pieces of advice from a financial advisor could differently affect investors' engagement with the market during increased volatility.

The experiment included an online sample of 880 Americans (representative by age, gender, and ethnicity), and took place in late May 2020--as markets began to calm.

The experiment’s design was simple. To ensure that our participants were aware of the market volatility, we had them read about the downturn of global stock markets with the onset of the novel coronavirus pandemic. They imagined receiving advice from their financial advisor on how to best manage their assets during market volatility in one of three forms:

  • Historical performance, where the advisor framed the market downturn as a path to increase the value of their investments,
  • Story, where the advisor framed the market downturn itself as a reason to stay in the market, and
  • Opportunity, where the advisor framed the downturn as an opportunity to buy a stock at a discount.

Participants then decided on changes they’d make to their portfolios: either sell their equity investments, invest more in the stock market, or make no changes. We also included the option “make no changes due to having no equity investments” to omit noninvestors (removing 105 participants). Only 48 participants decided to sell their investments (a sample size too small for meaningful comparisons), so we grouped them with those who decided to make no changes in order to form a “did not buy” group.

This study turned up three main findings:

  1. There's power in seeing increased volatility as an opportunity. Most people preferred to either stay put or sell when they faced the story and historical performance conditions. Only when the situation was phrased as an opportunity did the majority of people buy additional stock.
  2. The active stay active. Across all forms of the experiment, participants who self-identified as active investors were approximately 2.4 times more likely to want to buy during a downturn compared with people who didn't view themselves as investors or those who saw themselves as investors but are not making new investments.
  3. Emotions matter. Participants who reported experiencing positive emotions during the pandemic were more likely to purchase additional assets across all three forms of the experiment.

These findings suggest that during a downturn it may be more beneficial to help clients reframe their thinking so they feel positive about investing, rather than to simply encourage them to purchase.

Multiple Paths Through Market Anxiety When the markets grow increasingly temperamental, it's natural for investors to get nervous. There are, however, good reasons to weather the storm.

Our research shows that clients can benefit from market swings if they see downturns as a blessing, not as a curse. For anxious clients who have the resources to invest but remain hesitant, encouraging them to see increased volatility as an opportunity to earn a profit rather than as a reason to run can be a successful growth strategy.

This article includes research from Morningstar behavioral researcher Sarwari Das.

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