April 20, 2020
The recent market volatility can be stomach-churning even for seasoned professionals, so it’s no surprise that many clients are anxious.
Until the more extreme equity-market volatility subsides – as it eventually will, in our view – it’s important to be proactive, communicating regularly with a calm perspective to help soothe nerves. As an advisor, your counsel is crucial in times like these. Find the most convincing communications tactics for your business, and make sure you’re on point when working to calm investors. Here are four investment concepts important to communicate clearly.
Resist the urge to take drastic steps. People may think they have to stop the bleeding or, worse, get out of the market altogether. Others may want to try to grab bargains or try to time the market. What’s your tried and true method when counseling clients not to overreact in a volatile environment? Identify an anecdote that works with those who may want to act as soon as markets fall. Investors may know rash action based on fear is rarely wise but try to show how it could unnecessarily convert paper losses to actual financial losses.
An example: If you buy 100 shares of stock for $50 a share and the price drops to $40 a share, you haven't lost any money. Rather, the market value has simply declined. If you were to sell those shares at the current market price of $40, you would lose $1,000.
Clients also may not recognize the concept of an unrealized loss. Instead, allowing for the possibility of a rebound in prices may potentially allow an investor to avoid deeper losses from an immediate sale.
Stick to the plan (but think about future adjustments). This is the time to shine a spotlight on your advisory work and planning. Instead of tracking daily portfolio movements during periods of extreme volatility, investors can often be better served by a chance to reaffirm the investment plan, and avoid sudden, radical changes. Look for opportunities to suggest that clients step back and reconsider the general approach to asset allocation. You might revisit such topics as:
- Risk tolerance. Discuss with clients whether the bouts of volatility show that they aren’t as willing to face a sharp portfolio drop as they had assumed. Talking through a customized reassessment of a risk profile, including reconsidering potentially overly aggressive allocations, can go a long way to accurately resetting investor expectations.
- Diversified portfolio. This kind of discussion can not only help reassure investors, but also present an opportunity to talk through appropriate target asset allocations that are diversified for all market situations.
- Rebalancing as needed. As market changes skew allocations, talk to clients about rebalancing overweight positions to underweight ones.
Take a deep breath – and a long-term view. Even when it seems that rational behavior has left the markets, it’s important to reassure investors that this too shall pass, and normal valuations will likely return. Serving as a role model with a calm demeanor can go far to remind clients that the stock market has been through rallies and crashes before, and that extreme situations have historically been shown to resolve in time.
One idea is to point out that time can sometimes be an investor’s best friend, as bear markets (periods when the market fall by more than 20%) historically have been relatively short compared with bull markets. Even savvier clients may not realize that most investors, including those in retirement, should generally focus on the relatively long time horizon they have to allow their investments to recover. The charts below provide a snapshot of the time it took to recover after various market drops in the S&P 500® Index.
Stock market trajectory and recovery times
S&P 500 Index price, 1950-2020
Years to recover to previous highs following drops in S&P 500 Index
Source: Morningstar Direct.
Past performance is not indicative of future results.
Charts are for illustrative purposes only, not meant to predict actual results, and are not representative of the performance of any specific investment.
Down markets can create opportunities. Once the dust settles, the investing landscape is likely to be altered – a situation ripe for active management in our view. Active managers, with their bottom-up approach and reliance on fundamental research, are often better equipped to identify high-quality assets than simply following an index.
Discuss with clients the value of research and expertise, and some compelling ideas to keep an eye on together. Steer the discussion to the landscape in the quarters and years ahead, and bring them along on the journey. You don’t need to have all the answers or offer action ideas for today. Be there for clients and remind them how actively managed portfolios can take positions in tune with prevailing market conditions. Recall that conservative approaches often bring a measure of downside protection in volatile periods and that opportunities can be more likely to surface for investors who act with discipline.