Usually, shorter-term trading is not a good investment strategy, but some of this will be driven by our compulsion to look for opportunities in volatile markets rather than spending time in the market and using other, steadier investment methods to invest, such as pound-cost averaging.
The emotions involved in the first of these methods are greed and fear – powerful drivers that can result in heavy losses or considerable gains depending on how your specific investment goes. The latter requires a more relaxed approach with far less emotion attached, which has been proved time after time to provide better longer-term results.
Yet the point about investing and emotion needing to be separated can be applied much more widely than this. It is not all about making hot-headed decisions as you see markets swing wildly.
As Newcomb points out, the association between money and what it allows us to do or how we feel is almost impossible to completely obliterate and, more importantly, it perhaps should not be. For an adviser, understanding the emotional position clients are coming from when considering an investment is pivotal to determining whether it is right for them.
There is no doubt the ‘attitude to risk’ scoring questionnaires will go a long way towards helping you and your clients to understand the amount of risk they are prepared to take. But they can feel a relatively blunt tool that may not encapsulate the emotional reasons we invest.
For example, is a parent looking at investing to build a comfortable future for the family? Is the investment to pay for school fees? For retirement? For a dream holiday? A rainy day?
All of these are wrapped up in some type of emotion, and advisers failing to appreciate this are not giving their clients the best of themselves. Maths, logic and facts will only take you so far, unless you happen to be a Vulcan.
Money does not make the world go around, no matter what the song says. But we cannot deny that having it makes the ride more comfortable. And that is the key point to all of this.
Separating emotion and investment can only go so far before it fails to keep pace with our own reality. So, advisers need to be sure they are addressing both the emotional and investment needs of their clients with their advice, even if these are not obvious without a little digging.
Alison Steed is a freelance journalist
