Behavioural risk can happen any time
Behavioural risks can happen in bull markets as well as bear, Footitt notes. In the contemporary bull run he has seen the fear of missing out (FOMO) motivate investors who ask why they’ve not achieved 20+ per cent returns in line with the market. He’s had a few clients asking about the SpaceX IPO, even though that’s outside his firm’s structure and approach.
While Footitt is heartened to see that most clients have avoided some of the more hyped names on the market, he emphasized the importance of consistent communication rooted in the clients’ financial plan. When they want to chase higher returns in a bull market, he can point those clients to a plan that only requires a certain return threshold, and highlight the risks they’re now protected against on the downside. He believes that behavioural risk management should be factored into portfolio construction for exactly this reason.
“The best portfolio on a spreadsheet might not be the best for a client if they can’t weather whatever volatility it might hold. So it needs to be financially appropriate, but as well behaviourally suitable, because that helps us then balance the growth, the income, the volatility, downside protection, and their overall comfort,” Footitt says.
As a discretionary manager, Footitt has the trust of his clients to allocate as needed for their plan, but he can sometimes feel the emotional side of investing himself. At his firm, however, an investment committee steers decision making for client portfolios. When ideas are discussed openly among trusted colleagues, he explains, some of the emotional motivation behind a potential decision gets taken out.
Communicating in a noisy time
Consistent communication underpins Footitt’s approach to behavioural risk. He notes that the current media landscape puts huge pressure on clients to come up with reactions and decisions based on the news. Through frequent messaging, in high and low tension moments, he seeks to control for the way news can shape client emotions.
