It Feels Different This Time—but It Probably Isn’t

No matter how often market volatility strikes, behavior can be hard to manage with amplified uncertainty.

By Ryan O. Murphy, Global Head of Behavioural Insights, and Danielle Labotka, Behavioural Scientist

Life—and investing—comes with its share of unpleasant realities. One of the most infamous of these is behind the latest reality that is roiling the markets: taxes.

Tariffs are taxes on American consumers. They’re a blunt policy tool, often ill-suited for addressing complex real-world problems. The administration’s steep and reckless tariffs have sent global markets into upheaval and have been termed “a self-inflicted catastrophe” by Morningstar’s senior US economist.

For investors accustomed to dealing with unpleasant facts, self-inflicted damage is particularly hard to understand and endure. Volatility in markets is expected and normal, but the current situation feels like neither.

Have We Learned Anything From Previous Market Volatility?

One would hope previous experiences with market volatility would prepare us for the next round.

After all, once we’ve heard an impactful story, we don’t tend to forget how it ends. However, it can be difficult to see how each round of volatility is the same story of typical market patterns when the inciting events seem so different. For example, in 2020, investors knew intellectually that they (and the markets) had survived the last round of market volatility, but they were sent reeling because they had never faced pandemic-fueled volatility before.

Because every round of volatility feels so different, we try to reconstruct the narrative when we encounter it. So, we start by asking, “Why is this happening?” and “What should I do?”

There are always different answers to the first question; some reasons for volatility are harder to make sense of than others. This “self-inflicted catastrophe” might be the hardest to swallow yet, but that doesn’t change the answer to, “What should I do?”

“For investors accustomed to dealing with unpleasant facts, self-inflicted damage is particularly hard to understand and endure. Volatility in markets is expected and normal, but the current situation feels like neither.”

Our Advice to Investors: Do What Feels Unnatural

Regardless of how different it feels this time, our guidance to investors remains the same:

• block out the noise,
• focus on your goals and what you have control over,
• don’t try to predict or time the markets, and
• stay the course.

From the standpoint of behavioral science, we know being an investor is hard. It requires people to do at least two somewhat unnatural things: delay gratification by saving instead of spending and embrace uncertainty.

From the standpoint of behavioral science, we know being an investor is hard. It requires people to do at least two somewhat unnatural things: delay gratification by saving instead of spending and embrace uncertainty.

Humans are not naturally wired for either of these approaches, so this requires practice and discipline. But although unnatural, saving and fortitude pay off in the long run as investors can build up wealth and make their money work for them.

Sure, the ride is not always smooth. But over the long run, economies grow, technology and trade develop, and an increasingly interconnected system emerges that creates widespread (but not evenly distributed) wealth with widespread benefits. Huge tax increases are disruptive to that progress and have understandably shaken investors’ confidence, creating the increase in uncertainty. (The last time a de facto massive national tax increase was tried in the US was in 1933, and its effects just deepened and prolonged the Great Depression, disrupting economic progress, to say the least.)

Yet, our guidance stands the same as ever because even though it feels different this time, it likely is not. Market volatility is inherent in investing, regardless of its source. We’ve endured volatility before, and evidence repeatedly shows that trying to time the market by making exits and entries underperforms staying the course.

Right now, investors are asking themselves difficult questions. What is the administration thinking? How will the markets and other countries react? What is a narrative that ties all of this together? What will happen next? People want to understand the story they’re in so they can feel confident about their actions. Here, the reality may be that this story is not as simple as we’d like, but in any case, the best action is to hold tight.

As for what’s going to happen next, we don’t know. Nor does anyone else, really. But it’s worth remembering that good investing is not about having a crystal ball and knowing what will happen next.

Investing is, as it always has been, about having discipline, finding value, seeking diversification, and having the tenacity to endure the inescapable uncertainty of investing and take a long-term perspective.

We don’t know exactly how artificial intelligence technology will disrupt labor markets, or how climate change will affect weather and food production, or how a nascent virus mutation will manifest and disturb transportation networks, or even what the current administration will do next. But the long-term principles of investing remain the same, even in the face of amplified (and self-inflicted) uncertainty.

Since its original publication, this piece may have been edited to reflect the regulatory requirements of regions outside of the country it was originally published in. This document is issued by Morningstar Investment Management Australia Limited (ABN 54 071 808 501, AFS Licence No. 228986) (‘Morningstar’). Morningstar is the Responsible Entity and issuer of interests in the Morningstar investment funds referred to in this report. © Copyright of this document is owned by Morningstar and any related bodies corporate that are involved in the document’s creation. As such the document, or any part of it, should not be copied, reproduced, scanned or embodied in any other document or distributed to another party without the prior written consent of Morningstar. The information provided is for general use only. In compiling this document, Morningstar has relied on information and data supplied by third parties including information providers (such as Standard and Poor’s, MSCI, Barclays, FTSE). Whilst all reasonable care has been taken to ensure the accuracy of information provided, neither Morningstar nor its third parties accept responsibility for any inaccuracy or for investment decisions or any other actions taken by any person on the basis or context of the information included. Past performance is not a reliable indicator of future performance. Morningstar does not guarantee the performance of any investment or the return of capital. Morningstar warns that (a) Morningstar has not considered any individual person’s objectives, financial situation or particular needs, and (b) individuals should seek advice and consider whether the advice is appropriate in light of their goals, objectives and current situation. Refer to our Financial Services Guide (FSG) for more information at morningstarinvestments.com.au/fsg.  Before making any decision about whether to invest in a financial product, individuals should obtain and consider the disclosure document. For a copy of the relevant disclosure document, please contact our Adviser Solutions Team on 02 9276 4550.

Should All Financial Advisors Also Be Financial Coaches?

Since its original publication, this piece may have been edited to reflect the regulatory requirements of regions outside of the country it was originally published in. This document is issued by Morningstar Investment Management Australia Limited (ABN 54 071 808 501, AFS Licence No. 228986) (‘Morningstar’). Morningstar is the Responsible Entity and issuer of interests in the Morningstar investment funds referred to in this report. © Copyright of this document is owned by Morningstar and any related bodies corporate that are involved in the document’s creation. As such the document, or any part of it, should not be copied, reproduced, scanned or embodied in any other document or distributed to another party without the prior written consent of Morningstar. The information provided is for general use only. In compiling this document, Morningstar has relied on information and data supplied by third parties including information providers (such as Standard and Poor’s, MSCI, Barclays, FTSE). Whilst all reasonable care has been taken to ensure the accuracy of information provided, neither Morningstar nor its third parties accept responsibility for any inaccuracy or for investment decisions or any other actions taken by any person on the basis or context of the information included. Past performance is not a reliable indicator of future performance. Morningstar does not guarantee the performance of any investment or the return of capital. Morningstar warns that (a) Morningstar has not considered any individual person’s objectives, financial situation or particular needs, and (b) individuals should seek advice and consider whether the advice is appropriate in light of their goals, objectives and current situation. Refer to our Financial Services Guide (FSG) for more information at morningstarinvestments.com.au/fsg.  Before making any decision about whether to invest in a financial product, individuals should obtain and consider the disclosure document. For a copy of the relevant disclosure document, please contact our Adviser Solutions Team on 02 9276 4550.

Can You Teach Your Clients By Using Generative AI?

By Danielle Labotka, Behavioural Scientist

Educational resources are key for helping advisors market to new clients and engage existing ones. However, developing these resources does come at the cost of advisors’ most precious resource: time.

Generative artificial intelligence can be a helpful tool for streamlining the production of these resources—and fortunately, our recent research finds that investors are comfortable with this use of gen AI and expect it to improve their relationship with their advisor. This means advisors can leverage generative AI to save time developing educational materials, allowing them to spend more time face to face with clients.

It makes sense that people think this is a good use of generative AI in financial advising. Many investors are hungry for financial education, and summarizing is an activity that generative AI excels in. In fact, about half of Americans are already turning to generative AI to get insight on their personal finances. However, this means that people must vet the AI’s responses themselves, even when they don’t have the expertise. So, educational materials developed by a trusted expert leveraging the power of generative AI are a no-brainer.

Here are a few tips for how advisors can make the most of gen-AI assistance with educational materials.

3 Tips for Using AI to Write Educational Materials for Clients

First and foremost, remember that gen AI needs guidance.

It needs explicit instructions. Without these, gen AI tends to expound in different directions, resulting in unwieldy outputs. It also may hallucinate—meaning, it may make things up.

It needs to understand you and your client base. It doesn’t inherently know what your needs look like. So, you want to ensure the content resonates with your clients with regards to the voice that it uses (it should sound like you), and to what your clients may need or want to know based on individual factors like their wealth, the niche you serve, and so on.

So, let’s talk about how to get generative AI to make good educational resources for you and your clients. For this example, let’s say you’re explaining the impact of a Federal Reserve interest-rate cut.

Give the AI boundaries. Generative AI tends toward the verbose, but your clients are likely looking for quick and easy-to-understand information about a topic. So, set limits. In the prompt below, I have given the AI a length limit, asking it to stick to two paragraphs. I have also given it conceptual boundaries: Instead of simply asking it to explain the Federal Reserve’s interest rate, I’ve specified it should explain a cut to the interest rate and what it means for investors. Such boundaries will help AI stick to the information and length that you want.

AI-Assisted Educational Materials for Advisors 1

The use first asks the generative AI, “In two paragraphs, explain what a Fed interest rate cut is and what it means for investors.”

The AI’s output says, “A Fed interest rate cut refers to a decision made by the Federal Reserve, the central bank of the United States, to lower the federal funds rate, which is the interest rate at which banks lend to each other overnight. This adjustment is typically made in response to economic conditions, such as sluggish growth or rising unemployment, and aims to stimulate the economy by making borrowing cheaper. When the Fed cuts rates, it encourages consumer spending and business investment, as lower interest rates reduce the cost of loans for mortgages, credit cards, and corporate financing.

“For investors, a Fed interest rate cut can have significant implications. Lower interest rates often lead to increased liquidity in the markets, driving up stock prices as investors seek higher returns in equities compared to lower-yielding fixed-income securities. Sectors such as real estate and utilities may benefit, as their dividends become more attractive in a low-rate environment. Conversely, while fixed-income investments like bonds may initially decline in yield, they can also see price appreciation in the secondary market. Overall, a rate cut can signal a more favorable environment for risk-taking and growth-oriented investments, influencing asset allocation strategies across portfolios.”

Give the AI context. One of gen AI’s strengths is to adjust the tone of its output based on the context it is given. In the following prompt, I’ve given further direction by telling the AI to imagine it is an agent (a financial advisor) completing a particular task (write educational materials) for a given audience (clients). I’ve also asked it to provide a call to action at the end so clients will know to reach out about questions they may have on the topic. You can always get more specific with your agent, task, and audience based on your practice and needs.

AI-Assisted Educational Materials for Advisors 2

The user directs the generative AI, “You are a financial advisor writing educational materials for your clients. In two paragraphs, explain what a Fed interest rate is to your clients and what it means for them. End by giving them a few questions to ask themselves about whether they need to meet with you in light of what they’ve learned.”

The generative AI responds, “The Federal Reserve (often referred to as the Fed) is the central bank of the United States, and one of its primary functions is to manage monetary policy, which includes setting the federal funds rate. This rate is the interest rate at which banks lend money to each other overnight and serves as a benchmark for various interest rates across the economy, including those for mortgages, car loans, and credit cards. When the Fed raises the interest rate, borrowing becomes more expensive, which can slow down spending and investment, helping to control inflation. Conversely, when the Fed lowers the rate, borrowing becomes cheaper, encouraging spending and investment to stimulate economic growth.

“For you as a consumer, changes in the Fed interest rate can directly impact your financial decisions. Higher rates may mean higher monthly payments for loans and credit products, while lower rates can provide an opportunity for refinancing existing debts at more favorable terms. It’s important to stay informed about these changes as they can affect your budgeting, savings, and investment strategies. Consider asking yourself: Are my current debts affected by interest rate changes? Should I reassess my savings strategy in light of potential interest rate hikes? Would now be a good time to explore refinancing options for my mortgage or other loans? If you’re unsure about your financial plan in this context, it might be beneficial to schedule a meeting with me.

Edit the AI output. There are many reasons to not just copy what the AI gives you and send it out to your clients. For one, you should always check the output of AI because it sometimes hallucinates, and you don’t want to give your clients false information. But further, though the AI is all right at sounding like a person, it’s probably very bad at sounding like you. You should edit the AI to incorporate your own voice—that is, how would you say it in your own words? There may also be additional information you want your clients to know or explanations you prefer from experience. Given the personal nature of this last step, the rest is left as an exercise to the reader.

Creating materials with generative AI is an iterative process and not as simple as asking it a question and copying its output. Still, using it can reduce the time needed to produce valuable materials for your clients.

Since its original publication, this piece may have been edited to reflect the regulatory requirements of regions outside of the country it was originally published in. This document is issued by Morningstar Investment Management Australia Limited (ABN 54 071 808 501, AFS Licence No. 228986) (‘Morningstar’). Morningstar is the Responsible Entity and issuer of interests in the Morningstar investment funds referred to in this report. © Copyright of this document is owned by Morningstar and any related bodies corporate that are involved in the document’s creation. As such the document, or any part of it, should not be copied, reproduced, scanned or embodied in any other document or distributed to another party without the prior written consent of Morningstar. The information provided is for general use only. In compiling this document, Morningstar has relied on information and data supplied by third parties including information providers (such as Standard and Poor’s, MSCI, Barclays, FTSE). Whilst all reasonable care has been taken to ensure the accuracy of information provided, neither Morningstar nor its third parties accept responsibility for any inaccuracy or for investment decisions or any other actions taken by any person on the basis or context of the information included. Past performance is not a reliable indicator of future performance. Morningstar does not guarantee the performance of any investment or the return of capital. Morningstar warns that (a) Morningstar has not considered any individual person’s objectives, financial situation or particular needs, and (b) individuals should seek advice and consider whether the advice is appropriate in light of their goals, objectives and current situation. Refer to our Financial Services Guide (FSG) for more information at morningstarinvestments.com.au/fsg.  Before making any decision about whether to invest in a financial product, individuals should obtain and consider the disclosure document. For a copy of the relevant disclosure document, please contact our Adviser Solutions Team on 02 9276 4550.