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The Anxiety tax: how mental health undermines investor outcomes

Anxiety affects all of us. However much we are told to stay calm in a crisis and that worry does not achieve anything it is simply a feature of life that we must all accept and manage.


Yet some of us are more anxious than others, having what psychologists call High Tendency Anxiety. What is less well understood is how profoundly the residual anxiety levels we experience in day-to-day life can affect the long-term investment outcomes we experience throughout our lives.


A major study in the United States published in the Review of Quantitative Finance and Accounting by Kim in 2018 found that anxiety levels are one of the most significant factors which influence whether private investors get invested in the stock market and stay invested in the stock market.


Indeed amongst the factors that affect this it is arguably the only one that financial advisers can meaningfully affect. The study finds that religious preferences, income levels and whether people have family commitments can all negatively influence whether investors get and stay in the market. However, there is not much advisers can or should do about these things. Anxiety is different.


In fact anxiety is most likely to affect stock market participation amongst the most vulnerable clients. Lower socio-economic groups and those with weaker education levels are all more likely to not invest because of their general anxiety levels.


This fact of life is a powerful argument for face-to-face advice. The task of distinguishing between rational risk aversion, which encourages an investor to take the right amount of risk for their return objective on an efficient frontier, and unhelpful anxiety which pulls investors away from their optimal portfolio, is devilishly hard. No survey from a risk profiler is going to adequately address this and the concept of ‘risk tolerance’ generally results in a ‘score’ being given which whilst a useful input to the advice process does not distinguish between good risk aversion and bad anxiety. Only human beings working carefully can help to unpick these factors.


So what can financial advisers do to reduce anxiety levels and help in this situation? Behavioural psychologists agree that in many cases the best first step can be summed up in the acronym ‘HALT’. This suggests that we should delay an investment decision from a private client if they are ‘Hungry, Anxious, Lonely or Tired’. This is obvious perhaps but with anxiety we are helped by the fact that anxiety is a transitory emotion. It ebbs and flows regardless of the actual events in life actually changing. People do not stay in crisis for ever even if circumstances stay tough. Therefore, sometimes simply delaying a decision is all it takes to weed out anxiety. This simple intervention could be all it takes to set an investor off on a path to a risk level that meets their retirement needs and to avoid one that falls woefully short.


However, there are surely other factors that require more skill. Firstly, establishing trust at the start of a relationship and avoiding creating any future moments where trust can be broken is vital. Broken trust between an adviser and an individual can cause a spike in anxiety which is much more likely to mean a client will not trust us at that critical juncture where we are urging them to, for example, not sell their holdings after a market fall and ride it out.


Trust is of course broken when promises are broken so an advice approach which does not pretend to know the future and does not pretend that skill alone can protect investors from market falls is crucial. This may require a more disciplined explanation at the start of a relationship but will protect the relationship with an anxious client if things go wrong.


Psychologists also tell us that one key rule is necessary when dealing with high anxiety clients: We are told we must not try to reassure them that everything that concerns them is not a real problem. Often anxious investors are able to assemble a compelling bear argument to sell their shares and the tendency is to urge them to ignore these fears and downplay them. However, simply dispatching current anxieties accomplishes little for those in a high anxious state. They will simply fill the ‘envelope of anxiety’ with new fears. Instead, we are told to acknowledge the fears and the fact that they could of course play a role in affecting markets. Ultimately, for any investor to stay in the market throughout their life they must learn to sit with it.  It may help to demonstrate this point by showing how in every single year there has been a compelling bear argument for shares. The presence of a bear argument does not in itself provide a very good reason to sell shares. Indeed, if all that was required was a good bear argument none of us would ever stay in stock markets. It can help to simply remind investors of these bear arguments in each and every year and the return of the stock market throughout the period.


There is always a reason not to invest








Shares continue to rise over the long term despite continuous problems.











Past performance is not a guide to future performance. Capital at risk.

SPDR S&P 500 ETF Trust. Returns shown are Total Return in USD. Source: FactSet, data from 31/12/98 to 31/03/24.



Of course clever illustrations and calming words alone are never enough. The only real mechanism to encourage high anxiety people to stay invested and get the retirement they deserve is a long-term relationship of trust built with a trusted adviser.


This alone should encourage everyone to continue to ensure that there is space in our financial universe for good face to face advice that is supported by a commitment to clients rather than just a transactional approach to intermediating between a client and a product.



Notes: Read the study mentioned above which is published in the Review of Quantitative Finance and Accounting.






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