Addressing the psychological impact of market volatility on fund managers

Introduction

In 2021, the Chartered Institute for Securities & Investment (CISI) conducted a survey that produced results indicating more than 60 per cent of fund managers experiencing stress and anxiety, particularly during periods of high market volatility. Professionals like fund managers perform crucial roles in financial management, roles as important as standing as a chief pilot to clients’ funds, making sure that they are secure enough to yield low risk and high returns. They are saddled with the responsibility of navigating the market, and during times when volatility reigns, they harness opportunities and avert potential challenges, making decisions that affect the financial stance of their clients or organisations.

The difficulty of this role subjects fund managers to high psychological pressure, making them face mental downsides that pose a threat to their overall mental well-being. Sadly, if the mental strain evolves, fund managers may lose their jobs. This article therefore compacts the weight of market volatility on fund managers, proposing scientifically proven coping mechanisms that could serve as tools to easily navigate volatile market seasons.

“This uncertainty necessitates fund managers to adapt and make informed decisions to exploit opportunities and maintain financial portfolios, ensuring clients’ financial well-being.”

Understanding market volatility

Market volatility is a sudden and unpredictable period of unstable asset rates, often triggered by factors such as financial crises, political destabilisation, economic imbalances, global crises, currency fluctuations, and unintentional corporate earnings reports. The duration of the market’s state depends on these causative factors, making it crucial to have multiple approaches to navigate volatile markets. The VIX (Volatility Index) metric measures volatility in financial stock markets, indicating investor sentiments about potential market instability.

The global financial crisis in 2008 was preceded by market volatility in 2019 due to the COVID-19 pandemic and the Russia-Ukraine war. The VIX rate in 2020 was 82.69, surpassing the 2008 crisis ratings. This uncertainty necessitates fund managers to adapt and make informed decisions to exploit opportunities and maintain financial portfolios, ensuring clients’ financial well-being.

The management of financial portfolios during seasons of market volatility often results in a range of mental effects. Some of the most common impacts include:

• Stress and anxiety: Africans often overlook the importance of stress and anxiety in their lives, resorting to temporary remedies like good music or food. However, consistent pressure from fund managers during market volatility periods can lead to high levels of stress and anxiety. A 2020 survey by the CFA Institute revealed that 57 per cent of fund managers experience stress during these periods, highlighting the negative psychological implications of market volatility.

• Decision fatigue: Fatigue, a psychological phenomenon causing a deterioration of vital vitals, is often experienced by fund managers during volatile market periods. These managers are responsible for making decisions that determine client investments’ success or failure, leading to high blood pressure levels and cognitive depletion. In 2020, 46 per cent of Nigerian fund managers experienced fatigue due to the pandemic era’s decision-making challenges.

• Loss aversion: Fund managers often resort to conservative investment strategies due to fear of losses, leading to excessive risk-taking and gains. This phenomenon, as seen in 2000 during the dot-com bubble burst, resulted in tech-based fund managers withdrawing from initial market positions due to increased fear of loss, resulting in missed market opportunities and affecting their clients’ portfolio performances.

• Overconfidence bias: Market volatility can be a source of fear for some fund managers, while others may overconfidence due to past successful market navigation. This overconfidence can lead to reckless decisions, overlooking the different seasons of market volatility, and potentially causing excess risk in clients’ investments, indicating poor performance.

• Impact on personal life: Managing the portfolios of clients in volatile times is heavily demanding; this often takes a toll on the personal lives of fund managers. They experience difficulty in maintaining relationships, leading to a complicated work-life balance. This aligns with the survey results by Bloomberg in 2020, showing that 62 per cent of fund managers admitted to having broken personal relationships during the period of market volatility. The pressure surrounding those moments doesn’t need distractions; hence, they keep up with themselves and their jobs.

The Rescue

Related News

Psychological implications of any kind are unhealthy; it’s therefore important that amid administering professional duties as fund managers, they should imbibe coping mechanisms to keep their mental states afloat and build psychological resilience. Some of these coping mechanisms include:

• Emotional regulation techniques

Techniques for emotional regulation include meditation (Yoga) and socialisation (hanging out with friends, going on a date with partners, etc.). Fund managers should get themselves a bit out of the intensely volatile cycle. These short breaks allow the mind to rejuvenate and relax, bringing down emotions to a normal, regulated rate. This practice alongside exercise and good sleep contributes to lowering stress and improving the overall health of fund managers.

• Cognitive behavioural approaches

Cognitive-behavioural therapy (CBT) are techniques that help the mind to easily detect when it’s immersed with negative thoughts for it to be replaced with more positive thoughts. CBT has been proven to help manage fund managers in times like this where pessimism takes centre stage. This approach in 2020, through the study of the Harvard Business Review, revealed that 22 per cent of fund managers engaged in CBT improve in terms of decision-making when they are stressed, signalling the efficiency of the CBT approach.

• Risk management strategies

In volatile seasons, fund managers are advised to leverage risk management strategies, minimising the degree of loss. These strategies include diversification, hedging, take-profit orders, stop-loss orders, and position sizing, among many others, helping to reduce emotional pressure on fund managers. This relief gives them some sort of mental stability to channel their problem-solving skills to navigate the market.

• Team collaboration

It’s advised that fund managers work in a team during market volatility; this allows for the influx of creative ideas and eases the burden of a single-person decision-making process. When teams work together, a sense of collaboration is introduced, which in turn reduces pressure and builds confidence, leaning on the belief that if a potential loss is incurred, it’s a loss shared.

Clients, institutions and firms need to understand the psychological toll fund managers experience during market downturns; hence, the need to implement mental health support systems that could aid the operations of fund managers moving forward. These services range from the offering of counselling, stress management workshops, personal encouragement, and expressed optimism, all making the process lighter and easier for them.

Organisations need to inculcate a collaborative and open culture that allows for free communication, support, and teamwork as they are good cues for psychological security.

When this is encouraged, the mental strain of fund managers is reduced as they feel a sense of shared responsibility.

Conclusion

Market volatility in the financial world cannot be avoided, matter of fact, times like that are the period fund managers prove their mettle. However, in the heat of consistent pressure faced by these professionals, psychological lapses ensue. Mitigating the occurrence of these lapses requires fund managers to develop emotional regulation and cognitive behavioural strategies, and rely on effective risk management practices to build psychological resilience and overall well-being. Clients and financial institutions should also take it upon themselves to support the mental health of their fund managers, ensuring they are well compensated, have access to mental health support systems and continually promote a collaborative culture in their respective institutions.

Temitope George Ijibadejo, is an award-winning Forex fund manager with over 15 years of experience as a Forex fund manager, business developer consultant and trainer in Forex trading