Leap off a topsy-turvy ride of investing

The reason people relate to this image is because they recognise each of the emotions it lists; much like the five stages of grief, it transcends the differences between end-investors and professionals. We each remember the euphoria that comes with a portfolio that is shooting the lights out and the sinking feeling in the pits of our stomachs when it’s tanking. The three main motivators of investor psychology are so fundamental as to be evolutionary: fear, greed and the herd instinct.

Fear is what makes us sell out of an investment at the bottom of the market, greed is what makes us buy in at the top, and the herd instinct is what accentuates these upward and downward movements, creating the boom-and-bust cycle.

Quotes, from both the famous and the fictional, can act as cautionary tales to investors. From Gordon Gekko’s “Don’t get emotional about stock” from Wall Street, to the Sage of Omaha’s “Be fearful when others are greedy and greedy when others are fearful”. Although they are now dangerously close to being trite, they are truisms in representing the inability of the average investor to temper their emotions and allow rationality to persevere.

Personal investors can never completely overcome the intrinsic link between their emotions and their money. When the money you have invested is the retirement savings you’ve sweated for, the £20 a week you’ve put aside since becoming a parent to help your children with their student loans, or even the rainy day fund that covers a major home repair bill or a loved one’s care costs – you become emotionally attached to the opportunity cost of that money. This is why end-investors need financial advice and it is why the advice ‘gap’ continues to be such a hot topic. Financial advisers are accessible investment experts and can act in a capacity that saves end investors – their clients – from themselves.

In computer science there is what is known as the ‘abstraction principle’. Put simply, abstraction is the means by which highly complex inputs and outputs are translated into more human-accessible terms. This begins with the electrical circuitry in a computer being converted into binary ones and zeros. These are then translated into a machine code that can be interpreted by the various pieces of hardware within the computer. A further layer will then take this machine code and convert it into a more sophisticated computer language that programmers can write software with, and so on until the end result is what you see in front of your computer.

In a sense, financial advisers are that abstraction between a client and their investments – a conduit that takes the complexities of investments and translates them into a human-accessible output. By acting as that layer, advisers can prevent investors from making the mistakes of crystallising losses at the bottom of the market or buying into the market when greed and herd instincts have already pushed a bubble to, or near, critical mass.

In the world of investments we have a tendency to get wrapped up in our own periphrastic language – and make no mistake, asset managers are the most guilty of this – when what clients really need is plain English. Part of the value provided by financial advice is abstracting the highly complex and translating it into language investors understand, thus exorcising the emotion and hysteria that can lead to bad investment decisions and suboptimal outcomes. The regulatory mantra of fair, clear and not misleading is paramount.

Nick French is head of UK wealth management at Russell Investments