It is important to confront a key fact that is too little discussed. Investors have not amassed enough experience in the financial markets to be able to measure what is said to them against actual experience. Simply focusing on long-term gains, and minimizing the difficulties that rise up to challenge investors, has become a recipe for disaster.
For advisors, it’s not only important to have an understanding of the risk level for your portfolios but also the risk level for your clients that prevents their “flight” reaction. Inevitably, markets may behave unexpectedly and so can clients. Even the most seasoned clients can at times have knee-jerk reactions and mood swings because of innate and automatic self-preserving behavior patterns, which ensure our survival and that of our species as humans. This is due to Humans having multiple brains. Yes, you read that right.
We have our cognitive “Human brain” we commonly think of when we think of “Our brain,” but we also have what is now referred to as our “Reptilian Brain”. The Human Brain is responsible for thinking and reasoning while the Reptilian Brain is responsible for intuition or “gut feeling.”
We often get a feeling in our gut when something is wrong. If we are nervous, we experience butterflies in our tummy, or if we are stressed or worried, we experience diarrhea or nausea. Our reptilian brain sends signals to our human brain to let it know we are not OK. Let us give you an example. Have you ever been bitten by a black widow spider? What about a shark? The odds are no.
Yet, if you’re like most people, you’re probably going to be on the edge when you see a black spider or swim in a murky ocean. These fears are hard-wired into our reptilian brain. It’s not an experience you need to have to know you’re afraid of – fight or flight kicks in. There are no cognitive thoughts. Emotion just takes over our reasoning.
The same thing happens in investing. Prices will rise when they are expected to sink, or they sink when they are expected to rise. This tends to scare many individual investors i.e their reptilian brain’s fight or flight response kicks in. Our brains are not conditioned to process risk in a calm and logical way. But you as an advisor know that in investing – without risk there is no reward.
StratiFi’s PRISM Ratings™ risk scoring technology provides RIAs, asset managers, and broker-dealers more insight into the risks in their clients’portfolios and their own business, so they can pick the risks they want to take. Contact the StratiFi team to find out more and get started today!