Where Asset Allocation Meets Client Psychology

Christopher Geczy, Academic Director of the Wharton Wealth Management Initiative and the Jacobs Levy Equity Management Center for Quantitative Financial Research at the Wharton School, talks through why asset allocation still drives most of a portfolio's risk and what happens to that discipline the moment a client gets scared. The conversation covers:

• Why the rebalancing plan comes first. Volatility can work in an investor's favor, but only if the plan for rebalancing exists before volatility hits—once it does, risk aversion spikes and rebalancing gets hard to do.
• The neuroscience behind FOMO and the panic call. FOMO sits near a pain center in the brain and carries a strong social component; the panic call that comes during a downturn draws on that same wiring.
• Running the outbound call. With three or four hundred clients, advisors have to rank who gets called first during a downturn, based on what they already know about each client in good times and bad.