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Risk Tolerance and Behavioral Finance

By Advisor Perspectives
Wealth Management

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We have seen a powerful recovery in asset prices in the wake of the global financial crisis (GFC). We cannot forget, however, that more than $15 trillion in asset values evaporated in 2008–2009, wiping out gains earned in the bull markets of the 1990s and early 2000s. During the GFC, clients were horrified and did not know what to do. Of course, in hindsight, the right thing to do was to ride out the storm; some investors sold out and regret it to this day. History has shown that markets are cyclical, so another bear market will occur again, it is just a matter of time. When times are good, as they have been for the past eight years, our skills as advisors can get dull because we haven’t had to deal with panicky, stressed-out clients. But we need to stay on top of our game. Knowing that markets can grow suddenly violent, financial advisors must be able to diagnose irrational behaviors and advise their clients accordingly. That means incorporating behavioral finance into our practices.

Read more at Advisor Perspectives.

Photo: Geof Wilson

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