We’re all influenced by emotion. It’s what makes us human. But how do you make logical financial decisions when a pandemic threatens to destroy everything you’ve worked towards?

Emotions often have positive effect on our decision making. But in finance, they can sometimes hinder rather than help – and short term worries can mean poor choices over the long run.

This was certainly in the air the day my client rang, because the stock market was busy falling off a cliff.

No time like the present

I suspect you all remember just how bad things were in early 2020. I was worrying for my family, my clients, myself. It was pretty uncharted territory.

In financial terms, the FTSE100 would go on to lose over a third of its value in just a month.* It was like Wall Street Crash territory – or 1974 all over again.

And it certainly wasn’t the optimal environment to sell a business and consider the future.

My client had been a much-valued contact for many years. Over the years, we’d provided all the usual support: cashflow analysis, investment, tax planning, retirement preparation and so on.

All the while, he’d climbed the ladder to the top of his organisation – from finance director to chief executive. He’d worked incredibly hard to achieve his professional goals.

And now, satisfied with his accomplishments and looking forward to a change, he’d sold the enterprise in a deal that closed far quicker than he expected.

He’d looked forward to this moment for years. Now he needed to allocate the money into assets that could deliver his considerable lifestyle expectations – come what may.

So, when he called to tell me his great news, I paused for breath, took another look at my screen, and started to outline his options.

Fear and greed

There’s a branch of social science called behavioural finance. Here, academics and other specialists seek to better understand why emotion influences our financial decisions.

We’ve all made impulse purchases. But when it’s your money, and the situation is confusing, your emotions can lead you into unhelpful territory: from overconfidence and greed, to fear and worse.

People can get carried away in good times. They keep buying when the market really hasn’t much more to climb.

Or, they sell an investment after it’s performed badly, crystallising a loss.

But in the financial planning industry, there’s an old rhetorical question: “When’s the best time to plant a tree?”

In other words, planning your financial future is about setting emotion and short-term worries aside, setting goals, thinking about the long term and devising a plan to get there.

The grand plan

My client’s roughly £1m portfolio had been boosted by the business disposal to some £5m.

This – you might remember – was also when we had zero interest rates. So there were no real returns on cash or bonds, negative returns on equity.

My task was twofold. First, I had to determine exactly what he had, what he was aiming for, and to chart a course between the two. So far, so good.

But secondly – and this is when the value of a good financial planner can shine through – was constant reassurance, in the most difficult of times.

Our analysis provided some insight into the level of returns that needed to be achieved to meet his long term financial planning goals.

One proven approach is called phasing. In difficult conditions, where you are worried about the short term future you can select phasing. It’s also a handy process for eliminating emotion and is a useful way to enter the market at worrying times and certainly when the investment amount is significant.

It means you divide a lump sum into portions and invest them into the market in sequential phases over a period of time. It can insulate a lump sum from further losses but also expose it gently to the (inevitable) moment when the market turns upward again.

Overcoming fear

But it wasn’t an easy ‘sell’ to my client. He’s a demonstrably smart and successful individual – but these were different times and his dread of financial loss, after all that hard work, was palpable.

How do you persuade someone to overcome their fear?

What worked here was patience, understanding and empathy combined with single-mindedness that the data was on our side. In other words, we were confident markets would recover and that investing during April and May would be a good entry point. Phasing was the most logical way to enter and balance his risk and return requirements.

You can also build trust with accurate implementation. Once he’d approved the idea, we phased his money into the market, in £500,000 portions, spread over about nine months.

This approach also happened to collide with the optimism around the Astra Zeneca vaccine and the furlough scheme. The world felt slightly less terrifying and less chaotic. And markets reacted accordingly.

Fast forward a few years and the plan has been delivering the returns we aimed for – to the delight of our client.

It wasn’t an easy decision. But it was the right thing to do – and that’s what we’re here for.

* FTSE 100 high of 7436 on 21 February 2020, low of 4922 on 23 March 2020. Source: www.FT.com