When financial advisors help their clients understand market events and trends they can reduce concerns about their investments. That reduction in anxiety may help remove an emotional aspect from their decision making about alternative investing by putting those concerns into the right proportions.
Concerns about market volatility may have reduced in their feverish pitch but for many clients, the cumulative impact of the events of the last few years may have resulted in a reduction in risk tolerance. That may put the strategies behind their retirement plans at odd with what they can bear. The result? A desire to quickly move their assets into alternative investments. This kind of anxiety-based change underlies emotional investing. Alternative investments do have merit for many investors and might be appropriate vehicles for diversification for many. Yet, when motivated by emotional investing they can cause serious problems. While advisors are familiar with this dangerous dynamic duo, new approaches suggest that the risky mix of emotional investing and alternative investments may be harmonized by something as simple as education.
By definition, an alternative investment is one that is to state the obvious, one not made in traditional avenues. That is, one that isn’t in stocks, bonds, or cash. This can include private equity, venture capital, hedge funds, managed futures, collectibles like art and antiques commodities and derivatives. Most people classify real estate as an alternative investment as well. The main difference in types of alternative investment is the liquidity of the asset.
Additionally, investors may be reading results of alternative investments by large institutional clients and think that those investments will have the same results for them. Yet, that belies the effect that large institutions have on an alternative investment itself. As we said in 2022, “Part of what may be driving the renewed interest in commodities is the inaccessibility of the real estate market. Before the pandemic, large institutional investors moved from investing in commodities like timber into real estate. The result was that the real estate market began to tighten immediately prior to the pandemic when supply dried up. Institutional investors also shifted from commodities towards REITs and EFTs of commodities due to regulation changes. New, stronger regulations for institutional investors concerning loss reserves may have moved those investors away from commodities. This is partially because with global climate changes, commodities no longer grow at a somewhat dependable rate. With many large investors dominating the real estate market, others may have been interested in traditional commodities.”1
Emotional Investing also has potential costs. Emotional investing often ignores other aspects of investing such as tax implications, flexibility, cost of administration and focuses only on returns. Moving assets can ding employees with transaction fees, decreasing the amount they could be earning.
Nor should employees stick their money in an account and never re-assess their plans. That kind of investing isn’t un-emotional investing, instead its poor planning. As one expert said, “Only if you are aware of the need to do something different will you make changes to where you invest.”2 He suggested thinking of how Taylor Swift has managed her career as a model for several of the lessons around alternative investing. That kind of relatable sense of timing and expansion may help clients understand how to approach alternative investing from a non-emotional aspect.
In fact, encouraging education as an investing skill is comprehensively important. This can include education about emotional investing. Creating materials with common themes, such as Taylor Swift, that clients can comprehend easily and quickly are an important approaches. Education can also encompass volatility and risk management. That means enhancing the skills needed to understand how markets operate through comprehending their timing and responsiveness can lead to setting appropriate expectations, leading to less stress. When financial advisors help their clients understand market events and trends they can reduce concerns about their investments. That reduction in anxiety may help remove an emotional aspect from their decision making about alternative investing by putting those concerns into the right proportions.
One expert in alternative investing broke the concept down even further recently, noting that some investors may need to consider alternative investments within asset classes, rather than reaching first for alternatives such as real estate, cryptocurrency, or specific commodities (especially those prone to bubbles such as luxury goods or collectibles). Dustin Thackeray of Crewe Advisors proposes that education on diversification in asset classes can help reduce emotional investing.3
Advisors may want to consider multiple approaches for educational information on alternative investment. That may include the traditional client education events such as dinners and lunches, as well as less traditional approaches such as social media videos and interactive webinars. As always, whenever considering a new communication strategy, it is best to consult with compliance counsel first.
[1] https://www.bcgbenefits.com/blog/emotional-investing-and-commodities
These articles are prepared for general purposes and are not intended to provide advice or encourage specific behavior. Before taking any action, Advisors and Plan Sponsors should consult with their compliance, finance and legal teams.
Before leaping into the unknown, we recommend a thorough examination of your plan. Because we are experts in the field, we know the marketplace and know what your existing vendor is capable of offering. Through this examination, we can help you optimize the service you receive.
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