Getting in Touch With Your Investment Angst

Sunday, September 28, 2008; Page F01

The psychological state of the average investor these days is fluctuating somewhere between fearful, freaked, impulsive, obsessive-compulsive (just checked the 401(k) five minutes ago, better inspect again), outraged, disgusted, despondent, contemptuous, and sometimes, when the markets are perfectly aligned in just the right amount of downhill commotion, all of the above.

Things have turned so putrid that the other day a friend told me that his father, a retired accountant, pulled money out of his Fidelity accounts and used the cash to buy my friend's mortgage. He figures his son is a safer bet than the markets. And as long as his son stays solvent, he will be assured a steady percentage gain on his investment. With the government sputtering this past week to head off the economic tailspin, who can really blame him?

"Everyone wants to just run away from their problems," said Emily Chiang, an investment adviser at Alexander Randolph in Reston. Like other personal finance counselors, Chiang says the extreme market volatility has her playing an urgent role for which she has no real training: psychologist. How do you smooth a client's hysteria when your training has been in understanding how markets go up and down -- not wrestling with people's emotions?

Chiang reads self-help books for tips, but mostly she relies on instincts. For more help, there's a niche industry of psychologists and behavioral economists who are moving into the business of counseling personal finance advisers on how to better handle their clients' emotions. Last week, more than 200 advisers logged on to an Investment Advisor Magazine Web seminar and conference call to get advice on communicating with their clients during stressful times, hearing from several experts, including Olivia Mellan, a District psychotherapist who specializes in money issues.

"Everything about what I do is training personal finance planners to listen empathetically, to understand the clients' irrational behavior and build a bridge to wise action," she said.

I asked Mellan and Richard Peterson, a psychiatrist who co-founded MarketPsych, a Los Angeles psychological and financial consulting group, how personal finance advisers should deal with their clients during the market tumult and what clients should expect from the people who help manage their money. Peterson, who also capitalizes on the psychological behavior of others when trading for his hedge fund, said the interactions should mirror how therapists deal with any patient in a crisis.

"People have to get out of the stressful state and into the operational state," he said.

Let's take a conversation with a client calling the adviser and saying this: "I want out." The client might continue, "I've lost 10 percent since we started investing." Peterson would reply, "You've lost 10 percent since you started investing. You feel like now is the time to fold."

The key here is to show an understanding of the issue by repeating it back. Then fire up the empathy. "We didn't expect this to happen," Peterson might say. "But it's happening. It's really hard to have your dreams look further and further away. I can see that's wearing on you."

It sounds a little touchy-feely for a financial planning conversation, but suddenly the tide will change. "You show that you hear them, and that's all they really sometimes want," Peterson said. This can take from two minutes to 20 depending on the maintenance level -- high or low -- of the client.

Then Peterson would take the opportunity to put the market drop in perspective, maybe mentioning that it is starting to feel like the bottom, perhaps comparing the moment to the dot-com bubble bursting. If the client is following along, Peterson will show him a chart on how stocks did in the 10 years after a collapse.

"You are switching from the loss-avoidance system to the reward system," Peterson said. The point: To make the client see the opportunities that emerge at the bottom of markets and to not miss them. As Mellan put it: "You need to move from the primitive survival mode to the adult, rational-thinking mode."

Just the other day, Chiang fielded a call from a client who wanted to make to an irrational move. Chiang said her instinct was to listen, let her client vent, and once she saw an opportunity to make logical headway, she pounced -- just as Peterson advises. Her client backed off after carefully listening to the consequences for her long-term goals.

Relaxation and visualization techniques -- also a bedrock of therapy -- can be helpful in these situations, too. Peterson said one successful approach is for clients to sit back and visualize their lifestyle or retirement goals: the house in the leafy suburbs, the boat, the private schools they want their children to attend.

"You get them to think about the purpose of saving money, for their dreams and their vision of the future," Peterson said. "You will get them into an operational state. You don't achieve that dream by selling out at the bottom. Then you can say, 'Let's sell a little bit of one position and let's put it somewhere else.' That's an opportunity."

If all else fails, we can at least keep dreaming.

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