How can advisers help clients through market anxiety?

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

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

3 approaches to calming investors’ market anxiety
In our experiment, we sought to understand how market downturns can affect investors’ decision-making. Specifically, we were interested in whether particular pieces of advice from a financial adviser could differently affect investors’ engagement with the market during increased volatility.

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

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

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

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

This study turned up three main findings:

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

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

Multiple paths through market anxiety
When the markets grow increasingly temperamental, it’s natural for investors to get nervous. There are, however, good reasons to weather the storm.

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

This article includes research from Morningstar behavioural researcher Sarwari Das.

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  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.

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