Markets are roiling and stocks are off to their worst start to a New Year in history. With oil prices plunging and the Chinese stock market causing a global sell-off, clients may become increasingly agitated as they see their investment performance declining.
Concerned investors can easily lose track of the importance of maintaining a long-term outlook. We all know the damage a hasty response can wreak on an investment plan. The challenge for advisors is to keep anxious clients focused on their long-term goals while guiding them through the turbulent periods.
As an advisor, these challenging times can present unique opportunities. Now more than ever, clients will listen to you and heed your advice for diversification and prudent planning. Such times can provide you with the opportunity to help clients understand that market corrections, while unpleasant, are a natural and inevitable part of the market cycle.
And market downturns like the one we are currently experiencing can deliver a unique opportunity to strengthen your business. Your communication efforts will have a major impact on your clients’ trust and confidence in you.
As you field inquiries from anxious and fearful clients, here are a few basics you can share with them to help them keep calm through the storm.
In the short term, stock markets can swing dramatically. However, investors who have historically stayed the course with a long-term investment plan have been rewarded. On the flip side, investors who have historically traded excessively during volatile markets have underperformed the market. Though past performance is no guarantee of future results, the odds of achieving a positive return in the stock market have been much higher over a five- or 10-year period than for a single year.
What clients need to know:
- Market corrections are a normal part of the market cycle.
- As an investor, you can’t avoid market corrections. But how you choose to react to market declines can determine the long-term performance of your portfolio.
- Remind clients that their investment plans have been designed to hold up over the long term, and these short-term market movements should not derail your well-thought-out strategy.
- Consider the powerful influence of time when investing. As holding periods increase, the probability of positive returns has historically increased.
- On average, in the last 80 years, the stock market has experienced a down year one out of every four years, according to Ibbotson.
- Keeping a long-term focus can help investors manage short-term volatility and benefit from the market’s historically upward growth.
- Careful diversification of their portfolio is designed to cushion the blow of market retreats.
- Advisors can use this time as an opportunity to reinforce how their portfolio is aligned with their overall investment strategy and suitability.
Now is a good time to remind clients that it isn’t wise to play the “timing” game. Missing just a few days in the market can seriously hurt performance. Remind them, it’s time in the market – not timing – that’s truly important. While sitting on the sidelines, waiting for just the right time to invest, some of the market’s best single-day performance can slip by them.
What clients need to know:
- Historically, most of the biggest stock market gains occurred during very brief periods that are impossible to predict. That’s why it’s important to stay invested.
- By bailing out of the market during a market correction, you may be turning paper losses into real losses.
- History has proven time and time again that investors who are willing to wait out short-term volatility have been rewarded over the long term.
- Being out of the market, as measured by the S&P 500 Index, for just the 10 best days over the past 20 years would have reduced returns by more than 35%. Being out of the market for the best 60 days would have cost an investor nearly 140% of the potential returns over the period.
Investors are often faced with three options during market corrections: sell, hold or hold and buy more. With a hold and buy more strategy, an investor can add to a position in down periods and likely benefit in a future recovery.
What clients need to know:
- Even in extreme market conditions, as we have occasionally seen historically, selling at the bottom of a downturn is never a good idea. Waiting out the market downturn has historically rewarded investors. Even selectively adding to an investor’s positions, may make sense and may help the portfolio recover faster.
- If you sell at the bottom, you risk missing any subsequent rebound, which has historically been fast and robust.
- While it can be difficult at the time, periods when pessimism has prevailed have historically presented attractive long-term buying opportunities as long as such investments are aligned with the client’s overall suitability.
- We can use the market’s ups and downs to trim outside positions or to add to holdings where the investor can use additional exposure.
The importance of communication
Talking to clients when markets are falling can be a daunting prospect. But regular communication helps neutralize anxieties caused by short-term market movements. And just because clients aren’t complaining about market performance doesn’t mean they aren’t unhappy. There’s no better way to unearth the angst that may be quietly taking root in your clients’ minds than to extend an invitation to vocalize their concerns. By welcoming their feedback, you can address their concerns upfront before they snowball into an insurmountable wave of dissatisfaction.
Communicating during turbulent times can help you retain clients and could lead to additional referrals. It will also give you an advantage over robo-advisors because clients will value the personal attention and communication from a traditional financial advisor. Indeed, research by CEG Worldwide revealed that during the 2001 market downturn, advisors who focused on client contact rather than investment strategies captured 30 times more assets as advisors who focused only on investments.
Consider these ways to commicate:
Prepare ahead of time with notes on what you will say to clients. Then make client contact a priority – even if you have to devote a significant portion of your week to it. Most of your clients’ other financial providers will likely fail to reach out to them. You can be the one advisor who does and makes a big positive impact.