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How do you manage an excitable investor that doesn’t understand their risk level?

  • Explain how to strike the balance between confidence and overconfidence.
  • Describe how to overcome biases in excitable investors.
  • Identify how you can help clients navigate peaks in confidence.
CPD
Approx.30min

An overconfident investor can often be excitable about investing in something that they’ve heard about, whether from their friends and family or in the news. This could be a high-risk investment, such as bitcoin, or an aggressive allocation bet, where the client’s portfolio is heavily focused on one particular area.

If an investor is prone to overconfidence, they may not necessarily be thinking about the longer-term picture. The role of the adviser is to remind the client about the benefits of diversification.

By encouraging the client to spread their money across different asset classes, industries and geographies, the adviser can help the client to build a diversified portfolio with a more stable return profile and more resilient performance during market downturns. 

4. Taking a long-term view

By encouraging the client to consider what has occurred in the past and take a longer-term view of the situation—through cash flow planning, for example—an adviser can help avoid short-term thinking. With overconfident and excitable investors, it’s particularly important to ask those difficult questions they may not have already thought of.

What would they do if they lost their job? How would they cope if they got ill? What would happen if their house lost half of its value overnight? While the client might feel confident at the moment, they may not be preparing themselves for the unexpected.

By helping the client understand the different paths their lives could take and look at their investment decision making in an objective manner, the adviser is able to ensure that they are adequately prepared for the future. 

Some final considerations

An adviser is critical to navigating not only an investor’s troughs in confidence, but also managing their peaks. By understanding their clients’ personality traits and helping them to understand the dangers of acting rashly and succumbing to behavioural biases, advisers can help their clients invest confidently and productively. 

Louis Williams is head of psychology & behavioural insights at Dynamic Planner

CPD
Approx.30min

Please answer the six multiple choice questions below in order to bank your CPD. Multiple attempts are available until all questions are correctly answered.

  1. Investors who are overconfident do what according to the author?

  2. Confident investors are usually more risk averse.

  3. What is confirmation bias?

  4. What can too much confidence lead to according to the author?

  5. Overconfident clients are likely to ignore the advice of a professional adviser.

  6. Anchoring is what according to the author?

Nearly There…

You have successfully answered all the questions correctly, well done!

You should now know…

  • Explain how to strike the balance between confidence and overconfidence.
  • Describe how to overcome biases in excitable investors.
  • Identify how you can help clients navigate peaks in confidence.

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