Establishing clear guidelines is key to building a successful work model for employees.
By Sheryl Rowling, Morningstar columnist*
The traditional office environment is undergoing a dramatic transformation. Fueled by the covid crisis, technology, and a desire by workers for flexibility, remote work has become front and center in most industries, including advisory businesses. Like any significant change, it presents unique advantages and disadvantages for both employers and employees.
Advantages of Remote Work
Employees tend to prefer remote work because it offers highly sought-after flexibility that can significantly improve their work-life balance. By avoiding a commute, employees can have more time for family, hobbies, or simply more sleep! This can lead to increased satisfaction and possibly even higher productivity. Additionally, a home office could offer a quieter and more distraction-free environment, boosting focus and productivity. Finally, remote work can be beneficial for those managing personal commitments alongside careers or those who thrive in more solitary environments.
Employers can save money from implementing a remote workforce. Cost savings can include lower rents on office space, as well as decreased spending on utilities and office supplies. Perhaps the biggest benefit is that companies can hire top talent from anywhere, not just those geographically close to their offices. This can lead to a higher-quality, more diverse workforce.
Disadvantages of Remote Work
Even though many employees prefer it, the flexibility of remote work can be a double-edged sword. Blurred lines between work and personal life can lead to longer hours and potential burnout—or home distractions could result in substandard performance. Also, the camaraderie, opportunities for on-the-job learning, and sense of belonging that come from working with colleagues can be difficult to replicate virtually.
For employers, communication, the lifeblood of a cohesive employee team, can become more difficult in a virtual setting. Without on-site operations, opportunities for spontaneous brainstorming sessions and quick hallway discussions will be lost. Remote work models make fostering a strong company culture and team building more difficult. Finally, for companies where client interaction is crucial, remote work can be a challenge. While video conferencing helps, some clients may still value in-person meetings.
A Hybrid Approach
Many companies are finding that a hybrid work model can achieve the best of both worlds. A blend of remote and in-office work can fulfill the needs of employees, employers, and clients. To ensure communication and workplace cohesiveness while providing for clients’ preferences, it is best to have a combination of full-staff and half-staff office days rotating with remote days. An example of this would be full staff days in the office on Tuesdays and Thursdays, half staff days in the office on Mondays and Wednesdays, and full remote on Fridays.
Guidelines for Building a Successful Remote or Hybrid Work Model
Regardless of the chosen model (fully remote or hybrid), a well-planned approach is essential. Here are some detailed recommendations:
Clear Expectations
Document your expectations in a handbook that fully outlines your firm’s remote work policy. This handbook should clearly define work hours, communication protocols, and guidelines for equipment use and data security:
Work Hours: Specify daily working hours when employees are expected to be available and responsive. This helps maintain clear boundaries while offering flexibility. Consider offering some level of employee choice in determining their split between remote and in-office workdays. Note that certain roles might require more in-person collaboration, necessitating a more structured approach.
Communication Protocols: Outline preferred communication platforms (email, instant messaging, Microsoft Teams, video conferencing), and establish response time expectations to ensure efficient information flow.
Performance Metrics: Define clear performance metrics used to evaluate employee success in a remote or hybrid environment. This could include project deliverables (financial plans, investment reviews, and so on), number of clients served and client meetings/phone calls, and client satisfaction ratings.
Security Measures: Outline data security measures to protect sensitive company information. This includes data encryption policies, strong password requirements, and guidelines for handling confidential information remotely. It is also best practices to provide company hardware (computers, tablets, headsets) managed by company internal or external IT specialists.
Acceptable Use Policy: Clearly define acceptable use of company equipment and software to ensure responsible use of company resources. Employees should not be allowed to use company tools for personal purposes.
Technology
The success or failure of full or hybrid remote work depends heavily on technology. Reliable videoconferencing tools, cloud-based collaboration platforms (like Google Docs), scheduling tools, and project management software are crucial for seamless communication and information sharing between remote and in-office employees. Be sure to invest in high-quality hardware and software. Supporting a remote team requires tools that are robust and reliable.
Empowering Your Workforce
Managing a fully or partially remote workforce necessitates careful and thoughtful handling of employees. This includes training and support, fostering a culture of trust and accountability, and building teamwork.
Training and Support: Training is imperative in the areas of communication, cybersecurity, and work-life balance techniques. Communication training should include etiquette for video conferencing, best practices for online collaboration tools, and clear writing skills for emails and instant messaging. Employees should be educated about cybersecurity best practices to protect themselves and company data from online threats, including training on phishing email identification, strong password hygiene, and secure data handling practices. Beyond “technical” areas, employees should be offered training and resources to help maintain a healthy work-life balance while working remotely.
Fostering a Culture of Trust and Accountability: When employees are not on-site, it can be more difficult to supervise and manage them. Management should shift from monitoring activity to measuring results. Be sure to set clear performance expectations and provide regular feedback to ensure employees are on track. To do this, open communication and transparency must be encouraged between managers and employees. This will foster trust and allow for early identification and resolution of any issues. Finally, recognise and reward employees for their achievements; this motivates employees and reinforces positive behaviors.
Building Teamwork: Remote workers require more opportunities for building rapport with their co-workers, including formal and informal options. Formal options can include regular virtual team meetings (weekly or biweekly) to discuss projects, share updates, and promote informal interaction as well as organised virtual social events, like online games, trivia nights, or online book clubs. Informally, you can encourage remote workers to schedule periodic virtual or in-person lunches and also establish an online forum or chat platform for casual communication and knowledge sharing. This allows for peer-to-peer collaboration and fosters a sense of community.
Dealing With Clients
While employees might be thrilled with the opportunity to work fully or partially remotely, clients might not mirror that enthusiasm. Beyond maintaining your client service and quality at high standards, you must work to ensure a positive client experience at all levels.
While video meetings have become commonplace, when it comes to clients, it’s important to go beyond a one-size-fits-all approach. Communication is key here. Be sure to clearly communicate the flexible meeting options you offer. During initial client contacts, determine their preferred meeting format and honour their preferences. For long-term clients, realise that the shift to full or partial remote work will be new—and possibly scary—to them. Conduct a survey to get an idea of your client base’s preferences. Ask if they prefer in-person meetings, video conferencing, or a combination of both. Gauge their comfort level with different technologies and inquire about any accessibility needs. Consider categorising clients based on meeting preferences.
Finally, be prepared to answer client questions and address any concerns they may have regarding remote interaction. In the end, it is your responsiveness and service level that will make all the difference.
Be flexible in your meeting options, including in-person, video conferences, and hybrid meetings:
In-Person Meetings: Even if you have a fully remote workforce, you should maintain a limited office space (strategically located for client convenience) to host in-person meetings. Consider offering travel assistance (like Uber or Lyft) for key client meetings and initial consultations.
Video Conferencing: There’s nothing worse than fuzzy or garbled video conferencing. Be sure to invest in high-quality video conferencing hardware and software with clear audio and high-definition video. Train employees on proper camera positioning, lighting setup, and professional etiquette for video conferencing. Be flexible by offering clients to choose their preferred video conferencing platform (for example, Zoom, Teams, Google Meet). Finally, provide clients with clear instructions and technical support for joining video conferences.
Hybrid Meetings: To accommodate clients who want to participate remotely while others attend in person, you need to offer hybrid meetings. Again, be sure to use high-quality audio and video equipment to ensure clear communication for both remote and in-person participants.
Today’s employees no longer want to work in an office five days a week. To remain competitive and to attract and retain top talent, employers must be willing to adopt at least a hybrid remote work model. The success of this model depends on clear communication, flexibility, and a commitment to creating a positive work environment for both remote and in-office employees. To ensure the arrangement meets the evolving needs of your business, employees, and clients, be sure to regularly evaluate and refine your hybrid work policy.
*Sheryl Rowling, CPA, is a columnist for Morningstar. Morningstar acquired her Total Rebalance Expert software platform in 2015. The opinions expressed in her work are her own and do not necessarily reflect the views of Morningstar.
Adviser-to-client template: The expensive gap between time in the market vs. timing the market
“Just keep swimming, just keep swimming.”
Dory, Finding Nemo
As volatility in markets continues to test investor resolve, we think all investors could learn something from Dory.
This basic investment principle of staying invested sounds easy enough, but it gets trickier in practice. In our investment manager, Morningstar’s, annual Mind The Gap study, they found that on average, the actual return enjoyed by investors was 1.7% lower per year than the total return their fund investments generated over the same period*. While this may seem like a small difference, compounded over many years and into retirement, the opportunity cost is significant.
So – why the difference? Why do investors consistently leave returns on the table? To quote the findings, “Inopportunely timed purchases and sales cost investors about 22% of the return they otherwise could have earned had they bought and held.”
While cost, tax positions and other cash flow variables also need to be considered, the chart below helps to illustrate the importance of time in the market versus timing the market – a crucial and often expensive distinction.
Source: Clearnomics, CBOE
Past performance is no guarantee of future results. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. References to specific asset classes should not be viewed as a recommendation to buy or sell any specific security in those asset classes.
Investors who attempt to time the market run the risk of missing periods of positive returns, which can lead to significant adverse effects on the long-term value of a portfolio.
The chart above illustrates the value of a $100,000 investment in the stock market during the period 2005–2024, a period which included the Global Financial Crisis (the grey highlight) and the recovery that followed. The value of the investment dropped back to around $100,000 by February 2009 (the trough date), following a severe and protracted market decline. If you remained invested in the stock market until the end of August 2024, however, the ending value of your investment would be around $743,000. If you chose to exit the market at the bottom to invest in cash for a year and then reinvested in the market, the ending value of your investment would be around $434,000. An all-cash investment from the bottom of the market would have yielded an end value of only $174,000. While all market recoveries are not equal and may not yield the same results, staying the course has historically proved to be the best option for patient investors and removes the difficult decision of when to re-invest from the sideline.
A final point to make is that it pays to see the glass half-full when investing. The graph below represents the S&P 500 Index which stands for the Standard and Poors 500 Index, an Index of 500 large companies listed on the US stock exchange.
Source: Clearnomics, CBOE
Past performance is no guarantee of future results. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. References to specific asset classes should not be viewed as a recommendation to buy or sell any specific security in those asset classes.
While enduring the recessionary periods (the red) are painful in the moment, history shows that eventually, all bear markets have found a trough, paving the way for subsequent economic expansion and more bullish recovery. These phases of the economic and market cycle are not created equal. As the chart above shows, bear markets since 1956 have lasted anywhere from 6 months to two-and-a-half years. During these periods, the U.S. stock market has fallen anywhere from 22% (1957) to 57% (the 2008 financial crisis) at their worst points.
In contrast, bull markets (in blue) have lasted from about 2 years to over a decade in length, with the two longest cycles occurring during the past 30 years. The eleven-year bull market that ran from 2009 to 2020 experienced a price return of 401% and close to a 530% return with dividends re-invested. Investors who stayed the course once again came out on top.
So, in the face of market volatility, and the next inevitable market correction, Dory’s motto reigns supreme. Or, if you need a reminder from Warren Buffet, Chairman and CEO of Berkshire Hathaway: “The stock market is a device for transferring money from the impatient to the patient.”
If you have any questions about this note, or about your investments generally, please feel free to get in touch – I’m always happy to chat.
[Adviser name]
*Mind the Gap 2023. A Report on Investor Returns in the United States. (2023). pp.1–18.
Investors value advisers who attend to their financial and human needs.
By Danielle Labotka, Behavioural Scientist
In the past, I’ve likened a client’s view of a financial adviser to watching a duck swim across a pond. To the observer, it looks like the duck is effortlessly gliding across the water, but beneath the surface, the duck is rapidly kicking its webbed feet.
Similarly, an adviser is frequently hard at work doing things their clients will never witness. Unlike a duck, though, advisers face the additional difficulty of needing to demonstrate their value to their clients while much of the work that contributes to their value isn’t apparent to clients. This can lead to a mismatch between what clients think about an adviser’s work and what an adviser thinks. Therefore, advisers must understand what clients think an adviser’s value is so they can better highlight that value.
In our new report, we examined how investors value different capabilities of advisers. To uncover a holistic understanding of what investors think, we synthesise findings from three different measurements (ranking, willingness to pay, and open text) across four studies. Using different measurements allowed us to discover major themes in what investors value in an adviser, to help advisers better respond to them.
4 Main Things Investors Value in Advisers
Based on converging evidence across the four studies, we identified four major themes that reflect what investors are looking for in their advisers:
“Advice I can rely on.” Across all four studies, we found investors were looking for personalised financial advice that brings them comfort. Finances are a big cause of worry, and people often don’t feel they can handle their finances on their own, so they value advisers who bring them peace of mind.
“Helps me achieve my financial goals.” Clients in all four studies also valued advisers who can help them articulate their goals as well as support them along the way to finally achieve these goals. People tend to invest for a reason (not just to have more money but to have the money they need to live out their dreams), so advisers who can help bring clarity to these goals and help them come to fruition are valuable to investors.
“Keeps me on track.” In three of four studies, we found behavioural coaching was one of the most valuable things to investors. Though investors may not like the “behavioural coaching” label specifically, they recognise the need for help managing their financial habits, and they value advisers who can help them do so.
“Maximises my returns.” Though returns are often in the spotlight, we found only one study in which investors saw maximizing returns as a top value-add of advisers. Given the hidden nature of much of an adviser’s job, it’s not too surprising some investors may value something visible and measurable like returns.
Based on the evidence across the four studies, we created the “mind map” below to help advisers think about what clients value in their services. The size of each section of the mind map reflects how much evidence we found for each theme—the larger the section, the more evidence to support it.
Though all these concerns are worth addressing, keep in mind how much weight should be given to each concern based on the evidence. For example, though returns may show up in the mind map (they’re in the lower right corner), this section’s size compared with the other three values indicates it should receive less attention. Advisers may be better served by focusing on values that take up more space, such as “provides comfort by having the skills I don’t have to reach my goals.”
Mind Map of How Investors Think About Advisers’ Value
The four major themes of what investors value in a financial adviser based on analysis from Morningstar Behavioural Insights.
How to Provide Clients the Value They’re Looking For
The next step is for advisers to use the findings in this mind map to demonstrate their value—especially when it comes to contributions that can be opaque to clients.
To that end, we recommend advisers keep the following in mind to show their value to clients:
Advisers should demonstrate their ability to tailor plans to clients’ needs. Investors are looking for advice they can rely on for their situation, but if they can’t see exactly how their needs and circumstances are considered, they may fear that they’re receiving cookie-cutter solutions. Therefore, advisers should find ways to pull back the curtain to show clients how your processes account for them as individuals. For example, when you present plans to clients, let them know the client-informed factors you accounted for, such as their risk tolerance, timelines for their financial goals, and so on. Clarity on how your advice relates to each client will build confidence in the advice you provide.
Advisers should highlight goals in their client interactions. Investors see goal achievement as integral to the value of an adviser, so advisers should bring goals to the forefront of each step of the financial planning process, not just during goal-setting conversations. For example: How should clients respond to new circumstances to get them to their goals? How should they view the market given their goal progression? By putting goals at the heart of interactions with clients, advisers can better demonstrate the unique value they bring.
Advisers should show (not tell) clients the benefit of behavioural coaching. Investors recognise advisers can help them make better decisions with their finances. Still, they can chafe at the concept of behavioural coaching when it’s not introduced properly because they don’t like the implication that they are prone to mistakes. Therefore, it’s necessary for advisers to thoroughly illustrate the value of behavioural coaching. For example, advisers may talk about how they serve as a sounding board for clients when they make decisions. This not only gives clients the sense of how an adviser adds value by supporting their decision-making, but also does so in a way that does not feel like a negative judgment on the client’s own abilities.
Advisers should address returns in a productive way. Some clients will inevitably see returns as a key value-add for advisers, so advisers must be prepared to help clients think about returns productively. One way to do so is to help clients set better expectations for returns by giving them a meaningful benchmark. For example, advisers may focus clients on benchmarks that track toward their goals instead of beating the market more generally. In doing so, advisers speak to the value that clients see in returns without catering to unrealistic expectations for maximum returns.
A process to help you identify what really drives you.
By Samantha Lamas, Senior Behavioural Researcher, and Ryan O. Murphy, Global Head of Behavioural Insights
What are your top financial goals?
Most of us tend to have an idea of our answer to this question. But have you ever considered how stable or consistent your answers are? Or have you noticed that your goals may change with time or context? “What are your goals?” could be one of those questions that looks easy but is unexpectedly difficult.
If your goals are hard to pin down, or seem to drift, you’re not alone.
Research suggests that, even when considering important goals, people tend to answer with whatever is top-of-mind, which may not always reflect their true, long-term goals. For example, let’s say your social-media feed is recently inundated with friends’ photos from amazing vacations. After scrolling through yet another cinema-like video of a friend traveling through northern Italy, you decide to put down your phone and write down your financial goals.
At that moment, when considering your top, long-term financial goals, what comes to mind as a priority is to “travel more and take exciting vacations,” even though you may have not considered travel as all that important before.
Now, this doesn’t mean travel may not be a priority for you. And it’s also not a sign that you aren’t trying your best to think seriously about your financial goals. It just means that you’re human, and when faced with such a big and demanding question, our minds tend to take shortcuts, like the availability heuristic that equates “easy to recall” with “deserves more attention.”
In situations like this, it can be helpful to implement ready-made processes that help us be less of a stranger to ourselves and better understand our deeper motivations, rather than fixate on top-of-mind recollections.
3 Key Steps to Better Goals
We’ve used our research to inform a three-step process that can help investors more strategically identify their financial goals. This process forces investors to slow down and consider the topic holistically.
In practice, it provides the space and structure that people benefit from as they think deeply about what they want to do over the long term with their hard-earned resources. Here’s what the steps look like.
Step 1: Slow Down
First, take out a notepad and write down your top three investing goals.
Most important goal
Second most important goal
Third most important goal
Think of this as a brainstorming session, which can be useful to get things rolling. But remember that it’s just the first step, and anything written here should be considered “written in pencil.”
Step 2: Use a Process
Next, set the notepad aside and review an established list of common investing goals (see below). Consider each alternative, and mark off the goals on the list that are important to you. As you go along, cross out goals that don’t resonate with you.
Now, there’s nothing magical about this master list. The benefit is that it gives people a different perspective on what they might be motivated by, and moreover the opportunity to just evaluate options, rather than having to generate ideas andevaluate them at the same time. Doing two things at the same time is hard (think about trying to drive and read a text message simultaneously).
Step 3: Think Carefully
Now, taking both your initial list from the notepad and the marked-up list of common goals into consideration, think about your top three investing goals. Write them down on a new piece of paper. Has your list of top goals changed since Step 1? If so, how?
A Simple but Effective Approach: Build a Master List
If your goals changed, you’re not alone. In our research, we found about 70% of people changed at least one of their top three goals after going through this simple three-step process.
After considering the master checklist, some people who initially thought of their goals in broad, vague terms began to formulate ideas that were more specific and vivid. The master list also helped many respondents shift from initial goals that focused solely on financial outcomes (which tend to be impersonal and potentially unmotivating) to reframe their goals in terms of their emotional and personal values. This process helped them better understand their why (not just their what).
To Wrap Up
If there’s one thing you take away from this article, let it be this: Accurately identifying your financial goals is not easy, but there are vetted processes that we can use to help us unpack this important but deceivingly simple decision.
So, next time you are faced with the big, scary question of financial planning—“What are your overarching, 30-year, long-term financial goals?”—try using the steps above to aid your decision-making and break the problem down into manageable steps. It can help you make sure that you find your true goals, and not just things that are top of mind. This helps investors be less of a stranger to themselves and to identify their whyas they move toward where they want to go.
Are You Making These Investing Mistakes Ahead of the 2024 US Election?
We’re all prone to cognitive biases when facing uncertainty.
By Samantha Lamas, Senior Behavioural Researcher
Election years are a ripe opportunity for behavioural mistakes. There seems to be a lot at stake given the potentially huge change coming around the corner. Uncertainty hangs in the air, taking up all the oxygen in the room.
With all these stressors at play, it’s no wonder our minds ramp up our use of cognitive shortcuts, some of which are bound to lead us astray. As we inch closer to the 2024 election, here are a few cognitive biases and consequences I’m keeping in mind.
1. Confirmation bias, which solidifies our existing beliefs.
If someone were to ask me which bias I hate the most, I would probably say confirmation bias. This is our tendency to pay more attention to and more easily accept information that supports our existing beliefs.
The reason for my ire is that even if a person is diligently researching a topic to make a well-rounded decision, their brain may be fastidiously working to latch onto research that supports their existing beliefs. In other words, even the most well-meaning of investors may fall prey to this bias.
When preparing for an election, we may all be doing some sort of research to understand our preferences for key issues. As we do our due diligence, we must acknowledge that confirmation bias may be at play, swaying our opinion toward our preconceived notions. Existing research even notes that as we examine evidence that does not support our opinion, we are more likely to be critical of that evidence. On the other hand, we ask fewer questions regarding evidence that supports our opinions.
For example, if we see a social-media post that supports our preferred political candidate, we may be less likely to question the accuracy and sourcing of the statistics featured in the post or the credibility of the author. However, we may be much less forgiving for a post that criticizes our preferred candidate.
Confirmation bias is a conniving one, but we are not completely powerless to it. Before conducting your research, try to come up with a list of questions to judge the efficacy of evidence and ask those same questions for each piece you encounter. For example, maybe you want to ensure the research study sample was large enough and representative of the broader group in question – in this case, the United States. Also, make sure to read the same number of articles that support and oppose your existing opinion—this can help make sure you at least expose yourself to diverse opinions.
2. Availability bias, which prompts us to believe this time is different.
Past research suggests that elections do not have a meaningful medium to long-term impact on market performance. In other words, though the election itself may cause some volatility, it’s only for the short term.
If one were to read various media articles prophesizing doom and gloom for certain industries based on who is elected, this research finding may seem hard to believe. That’s because front-page/trendy media can be misleading and capitalize on behavioural biases to garner a strong reaction, like availability bias (our tendency to overweigh information that comes more readily to mind) and negativity bias (our tendency to pay more attention to things of a negative nature).
These biases prompt us to latch on to doom and gloom media and disregard the fact that these stories usually haven’t played out in the past. This results in our minds believing this election will be the one to solidify our fate—even though we probably felt that way about past elections, too, and things turned out OK.
The best way to avoid these decision-making errors is to conduct an information audit. Write down the news and information sites you believe are unbiased (or as unbiased as possible) and that report well-balanced, factual arguments. Make sure to include sites that support and oppose your political affiliation. Now, devote your attention to these sites. Don’t click on those eye-catching articles from questionable sites. Unfollow any influencers with dubious (yet somehow popular) claims. Delete any apps on your phone that may lead you to those in-demand but unhelpful posts. For example, I don’t keep the Apple News app on my phone.
3. Scarcity mindset, which prompts investors to make decisions under pressure.
An election year puts a deadline on our decisions. “If we don’t make a change before X becomes president, we are goners!”
This looming deadline and all the milestones leading up to an election may prompt investors to feel that they are under immense time pressure when making decisions. Unfortunately, this time pressure may prompt a scarcity mindset: Because we feel like we don’t have sufficient time, we are more likely to engage in reflexive responses, a more narrow and concrete style of thinking, and fail to think critically about the problem.
To avoid this decision-making trap, prepare for these supposed dire circumstances before they happen. For example, implement a trading rule that states you will not make any changes to your portfolio unless it falls by X%.
Also, don’t forget about the possibility of choosing to do nothing at all. As Danny Noonan found in his research, based on historical data, investors are better off ignoring Washington, D.C., entirely.
The Long-Term Investor Wins the Race
Presidential elections are important, and there is much at stake, but investors must remember that regardless of who wins, they are better off staying invested for the long term. As you consider your investing decisions amid the hubbub of the election year, keep these cognitive biases in mind.
A Key to Surviving the Global Market Selloff: Be Lazy
If you feel the urge to take action during market volatility, try these approaches.
By Samantha Lamas, Senior Behavioural Researcher
Here we go again with another round of market volatility sparking fear in investors’ hearts. But if we were to suggest one way to manage the volatility stress, it’s this: Be lazy.
During market volatility, our decision-making biases often get the better of us, prompting us to make impulsive choices that could have a lasting negative impact on our finances.
We may fall prey to recency bias and believe that an 8% drop in our portfolio means that it will continue to drop. Market volatility can also spawn herding behavior, leading investors to blindly following others as they collectively panic and sell.
We can’t eliminate these types of biases, but we can use time-tested techniques to prevent them from affecting our decisions. One of the easiest—and often best—things to do is … nothing at all.
With that in mind, here are a few tips we suggest for managing the current market volatility.
Tip Number One: Be Lazy
Market turmoil is unsettling. But if history has taught us anything, it’s that market volatility is an inherent part of investing and doesn’t matter too much for long-term investors.
Provided your portfolio’s asset mix is still a good fit for your time horizon and financial goals, you’re likely better off ignoring the short-term fluctuations. We know that’s hard to do amid news articles featuring fear-inducing phrases like “Wall Street bloodbath” and “$1 trillion wipeout.” So why not take a break from the constant market updates?
While it can be important to stay connected and up-to-date on world news, constant monitoring of media feeds (especially market fluctuations) can trigger behavioral biases that hurt more than they help. There is a line between being an informed investor and obsessing over market movements—and during market volatility, this line can become increasingly difficult to identify.
So, try setting up a regular schedule for how often you check your portfolio or even look over market news. Also, try limiting your news feed to trusted, well-balanced information sources—such as those that explain that a 1,000-point drop in the Dow is really only 2.5%.
Tip Number Two: Focus on Your Long-Term Goals
If you feel anxious about your finances and the market movements, take a break and consider your long-term financial goals. Reacquaint yourself with what you’re working toward, why you are saving, who inspired you to set those goals, and how you plan to reach them.
Consider this: Is your financial goal to beat the market? Or is it to have a comfortable retirement, buy a lake house in a few years, or save for your child’s college?
For many investors who have already tailored their financial plans (and attention) to their long-term goals, short-term fluctuations may not be too big of a concern. When examining the performance of your portfolio, keep your long-term goals in mind and not the day-to-day ups and downs of the market.
Adopting a long-term focus is not natural (nor easy with news cycles measured in hours), but you can use our three-step process to slow down and recommit to your goals.
Tip Number Three: If You Need to Take Action, Take Thoughtful Action
It’s hard to stay calm and wait out the storm when your portfolio is losing value—we all have a tendency toward action. If you can’t suppress that urge to take action, try redirecting it.
For example, instead of trying to identify investments you’re going to sell, spend your energy making sure your financial plan is on track to meet your goals. This could involve ensuring that your portfolio is well-diversified or checking that your emergency savings fund is sufficient.
Or, if a scarcity mindset is getting the better of you, it may be a good time to do a budget audit and cut down on any unnecessary expenses. If all else fails, reach out to someone you trust who can serve as a steady, guiding hand through this bout of volatility. This could be a professional financial advisor or a levelheaded loved one.
During Volatility, Our Own Behaviors Are Our Worst Enemy
We all know market volatility is a natural occurrence that will pass (as it always does), but the emotions we feel during it can be even more dangerous than market movements themselves.
When stress and anxiety are high (and contagious), it’s easy to give in to our biases and let them cloud our better judgment. Benjamin Graham warned about this many market cycles ago: “The investor’s chief problem—and even his worst enemy—is likely to be himself.”
But we can use lessons from behavioral science to prevent biases from derailing financial plans. We can make it easier for people to make the right decisions when it counts, sidestep biases when possible, and stay focused on our long-term goals. Sometimes that means evaluating the evidence, thinking carefully … and then doing nothing.
Adviser-to-client template: Current market volatility
For financial advisers to use with clients. This document is intended to support your service proposition to clients. It is produced by our investment writers with a deliberately light tone and structure. However, these are guidance paragraphs only. It is not guaranteed to meet the expectations of regulators or your internal compliance requirements. If you wish to remove or amend any wording, you are free to do so. However, please bear in mind that you are ultimately responsible for the accuracy and relevance of your communications to clients.
Dear client,
For those of you who enjoy your sport, I hope you’ve been relishing the Olympics. Amid the headlines about our athlete’s great achievements the current market volatility is also getting a few headlines. To address this, I’d like to share our perspectives in a manner that is helpful and relates to your circumstances.
A News Filter For You
No doubt headlines about large market falls make people anxious. In fact news outlets often glorify what is happening and ignore the broader perspective. Let’s start with a roundup of recent financial developments, filtered for you:
Australia –
The RBA met on 5-6 August 2024, with rates to remaining on hold at 4.35%, as recent inflation results have come in as expected. The unemployment rate is one of the key indicators to monitor.
Recent ASX volatility is providing some market jitters with investors becoming more cautious about the economy as fears of recessions start to build.
The August ASX reporting period will provide plenty of insight and direction for the second half of 2024.
UK and Europe –
The Bank of England cut rates on 1st August by 0.25%, the first rate cut since 2020. This follows the European Central Bank.
Keir Starmer is yet to announce any concrete proposals on taxes or pensions, but we expect them.
Local markets have held up reasonably well, with rate cuts generally cheered by investors. Local bonds are also holding up and offering diversification benefits.
US –
In a busy period, the Federal Reserve is very likely to cut rates in September, especially given recent evidence of a weak jobs market.
The US election is also twisting, with Kamala Harris hitting the lead in recent polling.
Finally, US tech companies are experiencing a correction after running hot earlier this year. Again, bonds are providing a ballast.
Asia –
Japan is making headlines, with the Bank of Japan rising interest rates unexpectedly. This has triggered the Japanese yen to rise quickly and Japanese stocks to fall, unwinding recent moves the other way.
Other emerging markets, including China, have had a bit of a challenging run but are holding up better amid the volatility.
On face value, it appears that bigger up and down days in markets (or vice versa) are upon us. However, this is not a sign of a broken market—it is very typical of what happens when investors are trying to digest new information quickly. It won’t last forever and won’t get in the way of us achieving your financial aspirations.
It is also worth noting the nature of setbacks. They are often a reversal of what has already run a little hot. For example, the Nasdaq in the US (an index of technology companies) has fallen by 10% since 9th July but is still up 13% this year. We can see a similar pattern across the globe.
Markets Never Move in Straight Lines
One key aspect we’d like to highlight is the benefit of diversification which helps your investments do well in a range of scenarios. With equities facing a patch of recent volatility, bonds have offered a ballast. This is by design. The economy and markets can change path, sometimes quickly and unexpectantly, which is exactly why we invest across a range of opportunities that complement each other. Our aim is to pursue a steady path that seeks to maximise returns without taking excessive or unwanted risk.
Changes That Can Benefit You
Turning to actions, this could become a great opportunity to add value in the pursuit of your financial desires. To do that, you will hopefully find the below helpful:
Don’t try to pick the exact bottom of any market correction – and don’t expect us to either. Markets don’t work this way. As Peter Lynch famously said, “Far more money has been lost by investors preparing for corrections or trying to anticipate corrections than has been lost in corrections themselves”. From all our analysis and knowledge, the best approach is to stay the course and invest consistently. The key is to understand probabilities and keep your money at work over long time horizons Morningstar’s philosophy of “investing for the long-term” helps clients ride out market ups and downs over multiple market cycles.
Consider interest rates. The RBA has remained in its holding pattern since November 2023, keeping the cash rate at 4.35%. While we’re seeing inflation coming down, the question still remains: is the trajectory steep enough? Australia’s unemployment rate is a pivotal piece of the puzzle, especially if inflation remains stubbornly persistent.
Stay focused on your goals. We have a financial plan in place to help you achieve what is important to you. If you’d like us to review your projections and planning, please get in touch. This will help you to stick to the plan – and please remember that changes in markets are part of the journey to achieving those goals.
See the positives in this. I’d like to end by sharing a Warren Buffett quote that I love whenever the market wobbles: “Every decade or so, dark clouds will fill the economic skies, and they will briefly rain gold. When downpours of that sort occur, it’s imperative that we rush outdoors carrying washtubs, not teaspoons”.The key here is that volatility creates opportunity, and when valuations further highlight such opportunities, Morningstar is taking advantage of this within our portfolios. Above all else, we are with you on this journey.
As always, we are very happy to help. Please let us know if you have any questions.
Adviser-to-client template: Investing internationally to avoid home bias
For financial advisers to use with clients. This document is intended to support your service proposition to clients. It is produced by our investment writers with a deliberately light tone and structure. However, these are guidance paragraphs only. It is not guaranteed to meet the expectations of regulators or your internal compliance requirements. If you wish to remove or amend any wording, you are free to do so. However, please bear in mind that you are ultimately responsible for the accuracy and relevance of your communications to clients.
To use, simply copy, paste and edit as needed.
Dear Client,
With ever-changing market conditions characterising much of the last few years, both in Australia and globally, I thought I’d take a moment to explain why Morningstar, our investment manager, chooses to build portfolios that invest both at home and away. Specifically, on the steps they take to mitigate ‘home bias’, a common behavioural pitfall in investing that can lead to a concentrated portfolio.
Home bias refers to an investing pattern where the investor favours domestic equities in their portfolios, without considering the benefits of foreign equities to adequately diversify. In Australia, our market accounts for just 2% of the global equity market. For Australian investors with 30%, 40% or even 50% of their portfolios invested in the local market, this presents a concentration risk, locking investors out of both diversification opportunities and potential returns.
This also means that if the Australian market underperforms global markets, as it has done recently, your portfolio returns would be impacted, and, therefore, your investment goals could also be impacted.
Another possible outcome of bias to Australian equities is overexposure to local sectors such as mining (materials) and banks (financials), which together make up 50% of the S&P/ASX200 index. Allocating a larger proportion of your portfolio to global equities allows you in invest in regions and sectors where there are opportunities that can’t be found in the Australian market. By having the flexibility to invest into both developed and emerging markets, as well as sectors in specific countries, portfolios can have greater diversification and increase the chance of potential positive returns.
Happily, the Morningstar team have invested with this risk in mind. With a preference for a larger allocation to international equities over Australian equities, your portfolio is positioned to withstand these domestic market lags. Currently, the team also have an overweight allocation to international equities, further hedging against domestic market underperformance.
Your portfolio is performing as we expect it to and is well placed for the coming months and years. If you have any questions about your financial plan, we’re always happy to discuss.
I hope you’ve found this update helpful, and please don’t hesitate to reach out with any questions.
The Psychology of Retirement Income: From Saving to Spending
Are you lost in the retirement consumption puzzle?
By Samantha Lamas, Senior Behavioural Researcher
The narrative of a miserly, Scrooge-like figure hoarding his wealth for years instead of enjoying his retirement might seem unbelievable—but unfortunately, it isn’t relegated only to fiction. It’s a cold reality for many retirees.
Although most retirees’ stories aren’t as dramatic as Scrooge’s, it’s not uncommon for retirees to have more than enough to live comfortably for the rest of their lives but still think a vacation is out of the question. In fact, a number of retirees actually experience a sharp decrease in spending and increase in savings in retirement.
According to the Life Cycle Hypothesis, this shouldn’t need to happen. A retiree who is financially prepared for retirement should keep a consistent income in retirement, and her overall consumption should not change. So why does this conundrum—known as the retirement consumption puzzle—happen, and what can we do about it?
Who Is Struggling to Spend Their Retirement Income?
About 25% of retirees fall into the camp of people who decrease spending during retirement. So although this doesn’t impact a majority of retirees, it’s still a meaningful number, and it’s concerning to see so many people not enjoying the fruits of their labor.
Moreover, research suggests this problem may worsen. Researchers found that the issue was most pronounced with individuals who use their own savings for retirement income—whereas people with guaranteed sources of income, such as annuities, Social Security, and pensions, were more likely to spend their income.
Thus, as more retirees (in some cases unwillingly) use financial accounts for their retirement savings, the group of “decrease spenders” may grow.
Why Do People Have Trouble Shifting From a Saving to Spending Mindset?
The idea of a person hoarding their money in retirement is not new, but researchers still haven’t been able to pinpoint the exact cause. There are plenty of theories, though—some with more support than others.
One line of thinking posits that people simply don’t need to spend as much in retirement. For example, when people retire, they may experience a drop in work-related expenses. They may be able to spend more time doing things they had to pay for in the past—now making meals at home or mowing their own lawn—and searching for the best deals for their purchases. And they may pay off their mortgage, thus decreasing their expenses.
Another line of thought points to more psychological reasons behind a change in spending patterns.
Before retirement, a person may be more susceptible to present bias (the tendency to focus more on the present situation at the expense of long-term planning) because their future labour income is uncertain, and they don’t yet feel an ownership of that money. That uncertainty gives them the flexibility to think things like, “I’ll work more hours next month to make up for this trip,” or “My boss will cough up that bonus soon.”
However, after retirement, they are on a fixed income and the money they are spending is coming from their own pocket. This shift triggers loss aversion—that is, the desire to avoid losses outweighs the desire to experience gains. In retirement, we know that overspending today will result in a sure loss in future consumption. In a world where that future you is 85 years old and unable to work, that future loss looms much larger than an extra extravagance today.
This bias may be further aggravated by the fact that though your future retirement income is certain, your future expenses are uncertain. These stressors may push retirees to remedy preretirement overconsumption, thus prompting them to spend less.
How to Manage Retirement Spending Woes
Each of these theories has some merit, but none of them completely solve the retirement consumption puzzle. I believe that there is no one culprit behind the retirement consumption puzzle because no one retiree is the same.
For example, for Scrooge, the loss aversion theory may fit the bill. He became so preoccupied with the dollar amount he has that he ended up drastically underspending in retirement. But because every retiree is different, and different explanations may ring true based on their personal circumstances, retirees may benefit from taking stock of their retirement spending.
This exercise may help you understand if your spending is lining up with your retirement funds and needs. In some cases, that might mean that not spending all of your monthly retirement allocation is “OK.”
Step 0 is to gauge your financial affairs and have a clear understanding of how much you can spend. Assuming Step 0 is complete, here are three ways to diagnose if you have a retirement underspending problem:
Refer back to your financial goals and life values (and if your financial goal was to retire on time, it’s time to set new ones). Consider: Are you meeting your financial goals given your current spending? Are you upholding your life values? If your life value is to experience new cultures, is your current spending allowing you to do that?
Try tracking your spending using an online tool that breaks down spending by category. It’s ideal to do this before you retire, but not essential. On a quarterly basis, check your overall spending and take note of any categories where your spending patterns have changed. Do these changes align with your financial goals? Did your spending on eating out suddenly drop, even though you love trying new cuisines with friends?
Take a moment to recognize your emotions when spending your retirement income. (Research finds that retirees who underspend are more likely to be worriers.) Are you constantly pinching pennies and afraid to spend?
The Pieces to the Retirement Income Puzzle
If you fall into the underspending camp, research suggests that people using guaranteed income sources are more willing to spend their income.
Although the causes of the relationship between annuitising and spending are still up in the air, there are a couple of theories.
For example, maybe people with an annuity feel they have more of a “license to spend” because they know they will always have money coming in. Or, maybe this phenomenon relates to how retirees think of their payments: If a payment comes from an annuity, it may feel like it’s someone else’s money they are spending (akin to labor income they earned before retirement). Since it’s not coming out of their own pocket, they may not be as prone to loss aversion and thus more at liberty to spend.
If you don’t want to take the leap to guaranteed income sources, try reframing your retirement income as a paycheck that someone else is paying you.
You can also try refocusing on your financial goals and life values. Put your goals and/or values on a Post-it note and stick it on your fridge, put them in your wallet, or add them to the notes app on your phone. Constant reminders of why you need to spend money—whether it’s to buy a condo near your grandchildren or to book that trip to Italy to taste authentic Italian cuisine—can be the nudge you need to make sure you make the most of your retirement.
Although not spending enough money in retirement may not be a universal problem, it does represent a huge, missed opportunity for the retirees in question. It’s important to remember that this is the money you’ve spent years toiling over and protecting. Now, during a long and happy retirement, is the time to put that money and free time to good use, funnelling both resources into your version of a life well-lived.
During Another Meme Stock Rally, Here’s Why I’m Investing Like It’s the Stone Age
Modern personal finance requires an ancient approach.
By Danielle Labotka, Behavioural Scientist
If you are not an extremely online person, you may have missed the recent Reddit post that kicked off another meme stock frenzy this week.
Even if you missed the latest hubbub, new technology has indeed brought investors more options for both what we invest in as well as how we invest in them. From flashy new investments like crypto to online trading apps that make investing faster and easier than ever, it can feel like the best time to be an investor.
Yet, I stand before you an investing Luddite. Why? Because as much as I’d like to think of myself as someone with sophisticated investment abilities, I’m working with the same hardware as my ancient predecessors, and I cannot deny the truth: Our brains are ill-equipped for such an exciting investing landscape.
To illustrate this, let’s look at what I might face during a meme stock rally.
Within moments of picking up my phone, I open Reddit and discover others are clamouring to buy the stock du jour. I see stories of people who previously invested in the stock and hit it big, and I pull up the current stock price and watch its meteoric rise. Suddenly, I’m hooked, and after a few taps on my phone, I find myself the (not so) proud owner of a meme stock.
All too swiftly, I have made an investment decision I didn’t really want to make, thanks to my cognitive biases—what we call mental shortcuts when they lead us astray.
For one, my interest was piqued by all the other people excited about it. This tendency to go with the crowd is called herding behaviour.
For another, I saw a lot of good news about this stock (both through anecdotes and through share price history), so I projected that recent success onto my future thanks to the availability heuristic.
Finally, I fell prey to action bias, which tells me that I need to “do something” in moments of excitement or I might regret it.
Our brains work this way for a reason. It was beneficial to our ancestors to be able to make quick decisions on little information. But when it comes to investing, making quick decisions with little information can cause us to make mistakes—especially when we are increasingly able to invest a lot of money with little effort.
And research supports that making good investing decisions can be difficult in the face of these new investment opportunities. For example, investors who use online trading platforms tended to make more trades and hold their investments for a shorter time, both of which can eat away at returns. We also found that investors’ motivations for investing in trendy assets like cryptocurrency are often driven by the desire to chase after returns like those they see in the news—another behaviour that amplifies losses.
What we see, then, is that although technological advances bring many benefits to investors, they also bring us many challenges by feeding into behaviours that cost us money.
How I Invest Like It’s the Stone Age
In the past, the amount of time and effort required to invest protected against our behavioural biases. To an extent, it forced us to slow down and rethink our knee-jerk reactions. But as technology has lowered these barriers, we must put in place our own guardrails to help us make good decisions.
To that end, I like to think back to the Stone Age when I’m investing. Though I have no desire to eschew Wi-Fi or electricity, I can learn a lot about executing long-term plans from that time. So, after I’ve decided on a financial plan, I turn to the Stone Age to help me stick with it and reach my financial goals.
I don’t read market news daily. Though knowledge is power, too much of it can distract me from my long-term plans. In the Stone Age, news took a long time to reach you, so only important information eventually got to you. Now, the important stuff is harder to suss out amid the stream of information we receive. By limiting the market media I consume, I’m doing the same thing: avoiding the noisy, daily ups and downs and staying focused on the big picture. This means that I may miss out on even knowing something like a meme stock rally is happening until it has long passed.
I remain skeptical of strangers’ stories. It’s all too easy for people to lie online, and it’s even easier for us to forget that. We are more connected to strangers than ever before and can feel ties to people we’ve never even spoken to. But historically, it was uncommon to interact with strangers and even more unlikely to trust their word quickly. Therefore, I approach others’ stories about investing success with skepticism. My skepticism helps give perspective; even if what they say is true, I won’t necessarily repeat their success by investing like them, which helps me stay focused on my plan and not theirs.
I do things slowly. I love convenience as much as anyone, but sometimes a little friction is warranted. If I were trying to change my plans in the Stone Age, it wouldn’t be as simple as a few taps on my phone while lying on the couch. When something is more difficult or takes longer, we have time to reflect and consider what we really want to do. For me, this means I don’t allow myself to make changes to my investments on my phone, so I at least have some buffer to consider whether I actually want to change my investments.
The cognitive biases we face when investing today have been with humans for millennia, so they won’t be going anywhere anytime soon. But by understanding how we can create our own tools to counteract them, we can still invest well and reach our financial goals.
For financial advisers to use with clients. This document is intended to support your service proposition to clients. It is produced by our investment writers with a deliberately light tone and structure. However, these are guidance paragraphs only. It is not guaranteed to meet the expectations of regulators or your internal compliance requirements. If you wish to remove or amend any wording, you are free to do so. However, please bear in mind that you are ultimately responsible for the accuracy and relevance of your communications to clients.
Dear client,
Given developments in the market, I felt it was timely to update you on where matters stand regarding your portfolio.
It has generally been a positive time for investors, with stocks especially doing well globally. That said, you may have seen a recent market setback, albeit subtle, with sentiment moving from positive back to a state of temporary worry. This is perfectly normal and setbacks are expected after a period of strength, especially given events in the Middle East doing little to calm investor fears. However, arguably the biggest change of late has been the latest inflation figures which carried some surprises. As a reminder, inflation is important because it is a key influence of interest rates. High inflation equals higher interest rates, which equals lower market sentiment; all things being equal.
Latest updates from the Australia, US and Europe
In Australia, annual inflation is now at 3.6%, which is much lower than a year ago but is still higher than markets expected and above where the Reserve Bank of Australia (RBA) wants it. Interest rate cuts probable, but not to the same size or speed as previously expected.
US inflation readings were also hotter than expected, rising to the highest level for six months and above forecasts. This is a bigger concern, with some tipping that the Federal Reserve may need to increase rates rather than cut.
As an outlier, Europe anticipates a more positive setting. The central bank left rates unchanged at their latest policy meeting and it could be that they move first with cuts during the middle of the year after taming inflation.
What does all this mean for your portfolio?
We avoid the guessing game of where inflation and interest rates might go next, as the evidence of economists predicting it correctly is so poor. But we do watch for unwarranted overreactions and extreme valuations, creating risks and opportunities.
Our general position is to use any periods of volatility to your advantage, where sensible. Research shows that the average investor gives up anywhere between 7% to 41% of their yearly total returns due to bad buy/sell timing decisions1, so we want to stop this. If anything, we want to do the opposite through good decision making.
Periods of volatility can rightfully cause some nerves among investors, but this is all part and parcel of the investing journey. By calibrating risk and keeping a healthy mix of selected equities and fixed income, as your portfolio has, we are well-placed to ride out the current uncertainty and harness advantages in the current landscape.
Relating this to the inflation story, if inflation persists, we have assets poised for success, including exposure to value stocks. Conversely, if inflation reverts to its target and remains stable, other assets we hold such as government bonds and a broader range of stocks will also do well.
While it’s crucial to mitigate risks, we remain of the view that this can be done without sacrificing growth. Successful investing demands planning, discipline and resilience. Our priority has consistently been to tailor your portfolio to match your risk tolerance and long-term goals. We remain on this path. By staying well-informed, upholding a diversified portfolio and adhering to sound financial planning principles, we can steadily advance towards your objectives.
Next steps
We do not recommend any actions resulting from the above update. Your portfolio is still well positioned for long-term wealth generation and should continue to serve its purpose.
That said, we are always open to dialogue on the long-term potential of the assets we hold, so please reach out to us if you have concerns. Meanwhile, we remain vigilant of unfolding events and will promptly notify you if any matters demand your attention.
Regards, Adviser
Important Information
As noted previously, this document is intended to support your service proposition to clients and the commentary does not constitute investment, legal, tax or other advice and is supplied for information purposes only.
This information 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.
Past performance is not a reliable indicator of future performance. To the extent the information contains general advice it has been prepared without reference to an investor’s objectives, financial situation or needs.
Investors should consider the advice in light of these matters and if applicable the relevant Product Disclosure Statement before making any decision to invest.
[1] Morningstar’s Mind the Gap report is available here: https://www.morningstar.com/en-uk/lp/mind-the-gap. It finds that globally, investors lose money due to behavioural errors. The 7-41% numbers are cited as “Gap as % of Total Returns” from the 2023 report in Exhibit 4. It covers Australia, Hong Kong, UK, Ireland, Luxembourg and Singapore.
Today Is the Best Time to Check on Your Financial Health
Two easy solutions to help you get started.
By Danielle Labotka, Behavioural Scientist
It’s a lie we’ve all told ourselves: “I’ll get to it tomorrow.”
But “tomorrow” never seems to come, and inertia is often to blame.
Inertia is our tendency to choose to do nothing when faced with a decision. The strength of inertia can keep us from addressing issues on our to-do list, and it can be even more powerful when the issues are complex, abstract, and require long-term thinking—which describes many financial decisions. It’s no wonder, then, that it’s difficult for people to get a handle on their personal finances.
But does that mean there is no hope? Or is there a way to motivate ourselves to tackle our financial to-do list?
Does It Take a Crisis to Make Us Improve Our Financial Management?
Though we are prone to inertia on a day-to-day basis, times of stress or crisis can activate our action bias.
That is, stressful situations often make us want to do something, even if it may not be the best course of action. Crisis can sometimes help us narrow our focus and home in on what is most important. So, does this mean that the threat of a crisis can be what it takes to help people get their financial homes in order?
In a recent study, we found investors overwhelmingly took some form of action when they felt the threat of a recession: In fact, 83% of investors started trying to get their personal finances in order. Though this sounds like good news, a further look into the specific things they were doing reveals that still many were missing some low-hanging fruit for financial health.
The most common actions that people cited were beefing up their emergency savings and paying down debt—which are important steps, but they weren’t taken by enough people to solve the problem across the board.
For emergency savings, only 38% indicated they were increasing their cash on hand, whereas 55% of Americans can’t afford to cover a $1,000 emergency. Furthermore, only 34% of investors were spurred to pay down debt, even though high-interest debt—like credit card debt—is something that needs to be addressed by many more.
Altogether, this suggests that although the threat of an oncoming financial storm (like a recession) may compel some investors to take that first step to improve their finances, it doesn’t get everyone on board. Many investors were not using their motivation to take key actions for their financial health.
Can Little Solutions Combat People’s Financial Inertia?
How else can we combat inertia? A (not so) radical idea is simply to make it easier to do the things that benefit you.
Here are two easy solutions you can put to work in your finances:
1. Let the robots do the work for you.
Studies show that automatically enrolling employees in their employer-sponsored retirement plan drastically increases participation rates. The logic here is beautifully simple: People save more when it’s easier to save. You can use the power of automation for your personal saving goals like building up emergency savings or paying down debt, too. There are already a number of tools that can help automate these processes, such as getting part of each paycheck sent to a savings bank account or ensuring that the autopay for a credit card balance is as high as you can afford.
2. Let conventional wisdom guide your decisions.
In addition to making things easier via automation, you can also simplify making those financial decisions in the first place. The fact is, there’s a lot of personal financial advice out there (and not all of it is good). Some people may want to pay down their debt or stock away more money for emergencies, but that’s easier said than done. How much should they save? Which debt should be paid down first? These questions add complexity that can allow inertia to win out.
However, rules of thumb can help people quickly answer such questions so they can move on to enacting them. For example, common rules of thumb suggest saving three to six months’ worth of spending for an emergency fund or using the “avalanche” strategy for prioritizing paying down high-interest debt first.
So, a simple solution to your financial inertia may start with identifying the issue you’d like to tackle and which rule of thumb you’ll use. From there, you can figure out how much money you can put toward that goal each month and use automation so that money goes directly to your goal without you needing to do anything more.
Rules of thumb and automation may not be the solution for all your financial issues, but these little solutions are a starting point to help you overcome that initial inertia. Once you hit that first financial goal, you can use that momentum to carry you forward to making bigger, more complex personal finance decisions.
How Advisers Can Create Financial Plans That Reflect What Investors Really Want
Sidestepping the limitations of goals-based planning.
By Samantha Lamas, Senior Behavioural Researcher
An investor’s goals are essential for any adviser to know, so they can create an appropriate financial plan. The problem is that many investors don’t truly know their own goals. And even if they do, their goals can change as their lives change. These are some of the limitations of goals-based planning, despite its importance and positive impact.
Even so, it’s clear that when done right, goals-based investing can be a win-win scenario for clients: They can reach their goals and avoid behavioural pitfalls in the process.
In our latest research, we explore whether providing a positive psychology framework could elicit deeper goals from investors. Instead of throwing in the towel, advisers must help clients uncover their true financial goals, which involves moving past top-of-mind and surface-level goals. Moreover, advisers need to account for some wiggle room in a person’s financial plan to prepare for changing circumstances.
How can advisers create financial plans that speak to what investors really want and also maintain a level of flexibility? This is where the concept of positive psychology comes in.
How You Can Find the Goals That Truly Make Investors Happy
Positive psychology is, in brief, the study of what facets of life contribute to happiness, fulfillment, and meaningful experiences. Adopting principles and techniques from positive psychology into financial planning highlights that our specific financial goals aren’t necessarily about the goal itself but about how the goal is going to make us happy.
In other words, there are different levels of goals: surface goals and deeper goals.
Deeper goals are the motivations that drive surface goals. These goals are more akin to life goals or values and are related to an investor’s personal requirements for living a fulfilling and meaningful life.
Both levels are important in financial planning, even though surface-level goals are more widely recognized.
Deeper goals provide two key benefits: They help investors connect their financial goals to the bigger picture and they leave room for change. Connecting a person’s surface goals to their deeper goals helps weed out irrelevant goals and uncover opportunities. Once the two levels of goals are connected, it can be easy to see which surface goals aren’t contributing to a person’s life happiness.
An investor’s deeper goals can serve as a constant North Star, even when they go through unexpected life changes: a job loss, receiving an inheritance, or divorce. A deeper goal gives investors a more concrete idea of what they should be aiming for with their finances. The means of how to get there may need to adapt, but the deeper goal remains the same.
For example, consider an investor who wants to buy a beach house. That’s their surface goal. After a bit of conversation, say you uncover that the investor wants the beach house so they can have a go-to place for the family to gather—which means their deeper goal is really to have more time with their family. With this deeper goal in mind, more possibilities open. Maybe they can achieve this same goal in other ways, such as buying a more affordable lake house.
Or, say a client’s surface goal is to retire early. Upon further digging, you uncover that what they really want is to have more time to spend on their passion of volunteering for charity. Given this information, again, more possibilities open. Maybe instead of retiring early, your client can work part-time instead, which still offers them more free time (and happiness)—and they can have it now, instead of waiting 15 years.
How to Use the Positive Psychology Framework With Your Clients
It’s not easy to guide clients through the discovery process of uncovering both their surface and deeper goals. Luckily, advisers can lean on ready-made tools and frameworks to help clients identify both levels of goals. Based on our research, advisers can better discuss goals by working through them systematically:
Start by helping clients uncover their surface goals. Past research suggests that many investors rely on top-of-mind goals during discussions and may need help getting to their true surface goals. We created a three-step exercise to help investors through this process.
Now, it’s time to get to an investor’s deeper goals. For this step, we refer to the PERMA-V framework—a positive psychology framework that states well-being is composed of the following components: positive emotion, engagement, relationships, meaning, accomplishment, and vitality. In our research, we asked investors to consider each of these components and add any more goals that come to mind after going through a goal-setting exercise. Our findings suggest that using a positive psychology framework like PERMA-V may help give advisers insights into a person’s life values—the things that are at the core of their well-being and what makes them happy.
Our research finds that this approach is helpful for ensuring that investors aren’t just relying on their biases or thinking about their most pressing concerns when talking about goals. Moreover, using a positive psychology framework, such as PERMA-V, can guide people through the process of unpacking their motivations.
By first prompting investors with a checklist and then deepening the conversation with a meaningful framework, advisers can explore the specifics of what a client wants as well as the broader drivers underlying their desires. Such conversations can prepare advisers not just to get clients to where they want to go but also to help them be open to alternatives that may also suit their needs.
For this project, Morningstar worked with an unaffiliated wealth management firm, PWL Capital.
Crypto, REITs, Private Equity: Long-Term Investments or Short-Term Trends?
By Samantha Lamas, Senior Behavioural Researcher
Investing trends are hard to ignore. Every swipe on your phone seems to boast a new (or reoccurring) investing opportunity that you must jump on—whether it’s a new crypto product or exposure to private equity.
The source may even provide valid-sounding reasons as to why the opportunity is a good idea. However, before you jump on the bandwagon, it’s worthwhile to consider if this opportunity is right for you,regardless of the overall benefits touted online.
Taking a step back before making the plunge can help you do two things in particular: make sure you’re not deceiving yourself and make sure your actions are in line with your financial goals.
Why Are Investors Drawn to New Investment Trends?
In our recent research, we asked individual investors about their knowledge of certain trending investments, whether they owned them, whether they were planning on changing their investment in each, and their motivations behind that decision. We focused on the following trends:
business development companies, or BDCs
commodities
cryptocurrency
private credit
private equity
REITs
semiliquid interval funds
separately managed accounts via direct indexing
structured products
This is, of course, not an exhaustive or perfect list of all assets that could be considered “trending investments,” but it covers the main assets that we identified from conversations with industry leaders and reviews of industry research and content.
We found that most investors only had a basic understanding of these investing trends. For most of the assets, fewer than half of investors felt they could even pick out the correct definition from a list.
When we looked at people’s motivations for making changes to their future investments in each asset, the most common reasons people gave had to do with returns, their confidence in the long-term viability of the asset, macroeconomic factors they thought could affect the asset, and their desire to time the market.
Notice how most of these reasons are related to short-term thinking, trying to time the market, overemphasis on present-day returns, and overreaction to events—common mistakes investors have always made.
Furthermore, many of the benefits commonly attributed to these investing trends—things like diversification, tax efficiencies, or transparency of information—aren’t at the forefront of investors’ minds. In other words, when it comes to decisions about trending investments, it’s all too easy to fall into age-old investing pitfalls.
Follow These 3 Steps Before Jumping Into Investing Trends
To avoid making an impromptu investment decision, it’s helpful to have a set process you can use to slow down, combat cognitive biases, and think carefully through future investments.
To that end, we created a three-step process inspired by our research. The process guides investors through recognizing their knowledge level regarding the investment topic in question, addressing their motivations and connecting those back to their financial goals, and then widening their perspectives:
1. Level-set: Use the following scale to understand how knowledgeable you are about the investment topic. If you rate yourself as 3 or below, hold off on making any decisions until you more fully understand the investment. Regardless of where you are on the scale, consider visiting a few trusted sources for more information about the investment.
Knowledge Level
2. State your motivations and align with your investing goals: Take a moment to state your motivations for making this investment decision. Consider choosing from the following motivations we found in our research. Carefully consider what is driving you to make this change to your investments. Next, consider if this motivation aligns with your financial goals. Fill in the corresponding area in column two with your explanation of how this gets you closer to your long-term goals.
Motivation
3. Deliberately broaden your perspective: Because of the way our minds work, this is harder than it seems. Set aside an hour and intentionally search online for three resources that disagree with your investment decision. For example, if you are looking to buy a particular REIT, read three resources that claim this is a bad idea. Finding and considering perspectives different from your own will help you reduce confirmation bias and garner a more well-rounded view.
Why Do Investors Keep Their Financial Advisers Around?
By focusing on returns, you may be missing out on opportunities to earn your keep.
By Danielle Labotka, Behavioural Scientist
It can feel like a marathon getting a client from the prospect phase to implementing a financial plan, so advisers may understandably see their work with existing clients as a chance for respite. Yet, like the Greek runners of yore, it’s important not to rest on your laurels.
The work of maintaining a client doesn’t always receive as much attention as getting hired or fired by one, but it is still vital to the arc of the adviser-client relationship. Focusing on how you maintain clients can ensure they are both engaged and happy—and happy people don’t fire their advisers.
We might think the main reason that clients keep their adviser is that they are pleased with their returns—we know investors can be overly focused on them. However, our previous research on why investors hire and fire their advisers suggest that returns may not be the dominating factor in how clients think about the adviser-client relationship.
As such, in our latest research, we examined why clients keep their advisers to help you understand how to earn your keep.
Top Reasons Clients Keep Their Advisers
We asked 620 adviser clients to tell us some of the reasons they continue to work with their advisers, and we found three common reasons.
Discomfort handling their own finances (37% of responses)
Quality of financial advice (22% of responses)
Behavioral coaching (16% of responses)
Clients also mentioned returns (12%) and their specific financial needs (9%) as reasons for keeping their advisers. Although returns showed up, they didn’t account for enough of clients’ rationale to be the sole focus of advisers’ efforts to maintain clients. In fact, 59% of the time, clients are keeping their advisers for emotional reasons instead of financial ones.
Are You Earning Your Keep?
Advisers must do more than generate good returns to keep their clients happy. Instead, advisers must fulfill clients’ numerous needs to build and sustain a base of those who will champion their practice. Based on the most common reasons clients keep their adviser, here are some ways to meet those needs.
1. To create comfort, foster trust.
By far the most common reason investors gave for keeping their adviser was that they didn’t feel comfortable enough, interested enough, or knowledgeable enough to do the work of managing their finances themselves. As such, clients are looking for an adviser they feel comfortable handing these issues off to, so it’s important to garner each client’s trust on that front. Our previous research indicates trust can be built on the foundation of a strong relationship in which an adviser cares about the client’s future, acts in line with the client’s best interest, and expresses similar values. Such a relationship requires having more-productive conversations with clients. Although this can be daunting, using frameworks and ready-made guides for discussions can foster these deeper relationships.
2. To demonstrate your value, focus on goal-based communication.
In looking at how clients talked about their adviser, we saw clients tended to talk about why the advice they got from their adviser was good. In short, clients are not just looking for good advice in a vacuum but good advice for them. This means it’s important for advisers to spend time helping clients articulate meaningful financial goals. But it’s also important to tie subsequent communication (such as communication about their portfolio’s construction and progress) back to those goals to help clients connect the dots between your advice and their goals.
3. To instill confidence in decisions, provide behavioral guidance.
Clients don’t often throw around terms like “behavioral coaching.” However, even without using the terminology, many clients identified key components of behavioral coaching in their rationale for keeping their adviser, like scaffolding decision-making. Clients want to feel confident in the decisions they make, but they may not ask directly for the behavioral coaching they need to get there. Fortunately, advisers can be proactive about providing the behavioral support clients need to feel good about their choices. A good place to start is by acting as a financial educator to clients and helping them prepare for times of stress, when making good decisions can be even harder than normal.
In the end, clients like working with advisers who provide reassurance, guidance, and advice tailored to their goals. Although an adviser’s work is certainly not done once a client is fully onboarded, the work of maintaining strong, positive relationships with clients has both extrinsic rewards for your business and intrinsic rewards for you.
