A more human case for smoothing

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But this reasoning misses a vital point. Investors experience markets in real time, not as a set of numbers on a page.  A sharp decline isn’t an abstract concept. For clients, especially those in, or nearing retirement, it’s immediate, visible and often uncomfortable.  So even well-constructed, diversified portfolios can fall short; not because of flawed strategy, but because the experience of holding them becomes too difficult to sustain.
 

Investing is emotional, as well as financial

One of the ways in which we can address this gap is to recognise that investing is an emotional, as well as financial, exercise. This is where smoothing can come into play.

In its simplest form, smoothing aims to soften the peaks and troughs of market movements, helping to create a steadier investment journey over time. What it can’t do is completely remove volatility, and it won’t be the right course of action for every client. For some, though, it can help to reduce day-to-day market noise and make it feel more manageable to stay invested. 

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When we look at it through this lens, smoothing becomes more about supporting client behaviour than about investment design. It aims not to change their long-term outcomes, but to make the journey towards them more emotionally comfortable.

 

Why behaviour matters

It would be easy to underestimate this behavioural dimension, but it can have a meaningful effect on how portfolios play out in practice. When we build them, we often assume that investors will act rationally by staying invested through downturns and resisting the urge to react to short-term changes.

Real behaviour doesn’t always work like that. Periods of market stress can lead to hesitation, second-guessing, or decisions that feel right in the moment, but which move clients away from their original plan. 

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You might have seen this described as the gap between intention and action. Clients may fully understand the importance of a long-term approach, but still find it difficult to follow through when markets become unsettled. Over time, these responses can weaken the effectiveness of even a well-designed strategy – not because it is flawed, but because it isn’t aligned with how the client is likely to react in practice.

 

From insight to application

If we assume, then, that behaviour plays an important role in investment decisions, the next question is how to account for it in a consistent and meaningful way. Enter the idea of ‘behavioural fit’.

Rather than relying solely on traditional measures such as risk tolerance or capacity for loss, it takes a broader view of how a client is likely to respond to the ups and downs of investing.  At its core, this involves two factors. The first is an individual’s underlying behavioural traits (some clients are more comfortable than others with uncertainty). These tendencies can shape how manageable a particular investment approach feels over time.

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The second is context. Depending on their circumstances, the same client might respond differently in different situations. Are they drawing an income? Are they close to or far from a specific goal? Do they tend to engage closely with their portfolio? The answers to these questions can amplify or reduce the emotional impact of market movements.

Taken together, this provides a more rounded way of thinking about suitability. It allows advisers to view risk in a practical rather than purely theoretical way, and consider whether a particular approach is likely to be sustainable in practice. Within that framework, smoothing becomes one option among many, and is potentially valuable when it helps to align a client’s investment journey more closely with how they’re likely to behave.

 

When smoothing might add value

The case for smoothing is usually strongest when the emotional impact of market movements is likely to influence decision-making.

This includes clients approaching or in retirement, particularly those drawing an income, because short-term market fluctuations can feel more immediate and consequential in this scenario. It can also be relevant for those who engage frequently with their portfolios, or who are more sensitive to changes in value, even when their long-term position remains sound. 

In these situations, smoothing can act as a buffer, not by removing risk, but by making it feel more proportionate and easier to navigate. For some clients, this can make them more likely to stay aligned to their original plan than to react to short-term movements.

 

Where principles and practice come together

Ultimately, investing is about finding a strategy that clients are able to maintain through different market conditions. 

A more behavioural view of suitability recognises that the way a portfolio feels can be just as important as its expected performance. By taking this into account, advisers can help clients make decisions that are not only appropriate on paper, but workable in reality.

Smoothing is one way of supporting that alignment. It won’t be right for everyone, but where it helps create a more manageable and consistent investment journey, it can play a valuable role alongside other solutions.

For more insights into how behavioural factors can inform investment decisions, download the Oxford Risk smoothing fit guide.