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Investors generally have a ‘’love-hate’' relationship with bad news. They hate unpleasant news about the economy and financial markets, but they love to read about it and simply cannot look away.
This negativity bias is also very much alive in other fields such as in sports news ‒ think Toronto Maple Leafs fans, for example – or political news. We’re surrounded by it, and we must learn to live with it.
But why does this happen and how can wealth advisors help their clients? Here are four ideas to consider to help break through the negative market noise.
1. Our brains are wired to treat threats as more urgent than opportunities
If somebody yells at you to say that you’re in danger, you will likely stop and listen to them even if you don’t know them. In contrast, if somebody yells at you to tell you that everything is fine, you will likely think this person is wasting your time.
The same goes for investing. Advisors face the challenge of making sure they educate clients on doing the polar opposite of what their brains are signalling.
That means downplaying the perceived ‘’threats’' of bad news while promoting opportunities of doing the basics of personal finance that are often sources of procrastination, such as financial planning, systematic investing, and diversification, among others.
2. People remember pessimistic events more than positive ones
If you ask a typical investor what some of the worst years in the stock market were in the past two decades, most will be able to remember 2002 and 2008.
But ask investors what some of the best years of the stock market were and most will not be able to remember any. The two best years for the S&P/TSX Composite Index were 2003 and 2009 – ironically, right after the worst ones.
Good advisors will make sure to communicate and celebrate the good years with their investor clients. If advisors don’t bring attention to these events, they will likely be forgotten.
3. Bad news grabs front-page headlines while good news is gradual
There has been a lot of talk about the next economic recession recently, and it’s been in the headlines of most major news outlets for many weeks now.
While recessions should never be underestimated, good advisors will help their clients by having evidence-based discussions about them.
A good example is showing investors data that illustrate just how many days there have been in the stock market while the economy has been in recession versus when it has not. For example, from Jan. 1, 1970 to March 31, 2022, there were 2,539 days while the U.S. economy was in recession compared to 16,543 days while the economy was not in recession, according to data from the National Bureau of Economic Research.
Headlines around recessions will always dominate the news, but we live in them only 13 per cent of the time. Statistics like these should help reassure investors.
4. Pessimism tends to push investors toward taking action
Optimism often requires believing in unknown, unspecified future breakthroughs, which seem naïve compared to pessimism, which focuses on tangible actions.
That’s why investing is a test of character more than a test of intelligence. That said, in order to “scratch that itch” to take action, good advisors can work on preparing their clients for economic downturns by going through “what if” financial planning scenarios, doing pre-mortems of a bad year on the market, and by having conversations on the subject ahead of it happening.
These small habits will compound over time and help investors better navigate the challenge of dealing with the constant flow of negative news.
Pessimism is everywhere and will always be, but understanding it can make a big difference in how advisors can guide clients in approaching life and their investments.
Jonathan Durocher is president of National Bank Financial Wealth Management.
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