Gain Over Pain: Helping Investors Stay in the Game

One thing we know about the markets is that they are sure to go up and down. Loss aversion is a well-established cognitive bias in behavioral finance. While investors love to make money, they hate losing money much more. Time and again, investors underperform the benchmarks and do not achieve their long-term goals because they sell out of the market at the wrong time in order to avoid pain.

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Running from Danger

Ironically, clients would have the same emotional response to a bear market as they would have to an actual bear chasing them in the woods. In either scenario, adrenaline spikes, areas of the brain responsible for rational decision-making are reduced, and the body turns on systems that can help a person run away from danger and preserve their safety.

The ability to conserve energy from systems that aren’t absolutely necessary in favor of contributing energy to systems that can help us run away from danger made a lot of sense to our ancestors on the plains of the Sahara thousands of years ago. Unfortunately, those same systems can wreak havoc on our decision-making capabilities, and even our health, if they aren’t kept in check.

Focusing on Growth and Safety

At Clark Capital, we focus on risk management so that clients can avoid making emotional decisions driven by loss aversion. One way we help investors prioritize gain over pain in their investment portfolios is by giving them the option to take a small piece of their portfolio and hedge it by using volatility instruments that track the VIX, such as ETFs like VXX, VIXM, and individual options contracts.

For advisors and clients who choose to overlay a hedging strategy on a portfolio, the majority of the portfolio is focused on providing long-term gains. The comfort of knowing that a small portion of the portfolio is invested in vehicles that typically go up when the market goes down can help investors focus on their life goal, such as funding a child’s education, buying a second home, or leaving a legacy.

Patty Quinn McAuley is the Director of Marketing at Clark Capital Management Group, a participant in the ETF Strategist Channel.

[1] http://alleer.com/wp-content/uploads/2013/08/DECIDE_Excerpt.pdf

Disclosure Information

The opinions expressed are those of the Clark Capital Management Group Investment Team. The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass. There is no guarantee of the future performance of any Clark Capital investment portfolio. Material presented has been derived from sources considered to be reliable, but the accuracy and completeness cannot be guaranteed. Nothing herein should be construed as a solicitation, recommendation or an offer to buy, sell or hold any securities, other investments or to adopt any investment strategy or strategies. For educational use only. This information is not intended to serve as investment advice. This material is not intended to be relied upon as a forecast or research. The investment or strategy discussed may not be suitable for all investors. Investors must make their own decisions based on their specific investment objectives and financial circumstances. Past performance does not guarantee future results.

Past performance is not indicative of future results. This material is not financial advice or an offer to sell any product.

Clark Capital Management Group, Inc. is an investment adviser registered with the U.S. Securities and Exchange Commission. Registration does not imply a certain level of skill or training. More information about Clark Capital’s advisory services can be found in its Form ADV which is available upon request.

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