If you had assets invested in the stock market in 2008, odds are, you experienced post-traumatic stress following the market collapse and succeeding crisis.
When we think about post-traumatic stress disorder, we typically envision combat, tornadoes, and hurricanes. But PTSD is not limited to life-threatening events. Events threatening financial security (and even career-security) can be very traumatic.
A recent study reported in Health & Social Work examined the risk of PTSD associated with sudden and dramatic personal financial loss. The authors conducted a survey of 173 Madoff victims and found that 58% met the criteria for the PTSD diagnosis, 61% acknowledged high levels of anxiety, 58% were depressed and 34% had health-related issues. Moreover, 90% of these victims felt a substantial loss of confidence in any financial institutions.
In short, severe economic trauma can lead to PTSD!
We know from Dr. Abraham Maslow that when people have their security threatened through any event, all of their confidence and self-esteem can be destroyed, and they then focus all of their attention on searching for recovery. Certainly, this holds for both clients and financial advisors, when their financial security is undermined.
According to a paper by Bradley Klontz and Sonya Britt of Kansas State University the emotional well-being of financial advisors during the 2008 financial crisis (documented in the May, 2013 Journal of Financial Therapy), showed that 93% reported medium to high stress levels and 39% of the advisors reported stress symptoms at levels considered to be diagnostic of PTSD (The study can found using the link below). In the case of advisors, it was not only the threat to the security of their careers, but the threat to their own portfolios, as well. After all, in an ideal world, advisors basically make the same financial decisions and use the same strategies with regard to their own portfolios, as they would make for their clients’.
So, many investors suffered the double whammy of major losses in both their clients’ portfolios and in their own portfolios. Added to this stress, is getting bombarded with calls from frightened, disgruntled and hostile clients, who blame the advisor for not having seen this coming.
Klontz and Britt explain that advisers assume tremendous financial and emotional responsibility in managing client assets, and although side-effects such as sleep troubles, anxiety and concentration problems have ebbed since those first few harrowing months after the crisis, others, such as questioning the most basic assumptions about how to help clients reach their financial goals, have persisted.
Almost half the planners (47%) surveyed in February and March 2009 agreed or strongly agreed that the “financial crisis has caused me to question what I thought I believed about how to help people create the life they want.” And 42% agreed or strongly agreed that the “economic situation represents a fundamental change in the rules that have governed the products and services I have provided my clients.”
The paper, “Financial Trauma: Why the Abandonment of Buy-and-Hold in Favor of Tactical Asset Management May Be a Symptom of Posttraumatic Stress,” points to data from financial services industry writer and commentator Bob Veres showing that 83% of advisers are practicing some form of tactical management post-crisis, a significant shift from a pre-crisis focus on more-conservative buy-and-hold strategies. They conclude that although acute distress may have abated in recent years, cognitive changes linger — potentially compromising the health of client portfolios going forward.
“Planners might benefit from exploring what, if any, psychological remnants from the 2008 financial crisis may be influencing their portfolio decisions today,” the paper states. “In an effort to avoid future financial trauma … the increase in tactical management based on the myriad conflicting economic predictions will inevitably create more.”
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