When is the Best Time to Get Out of the Market?

With all the recent market turmoil, many clients may be fearing a Groundhog Day of sorts, wondering if we’re headed right back into another 2008 debacle. Some may want to pull every penny from the market; while others may cautiously wonder if these steep drops will quickly pass. In either of these two scenarios, consider this question with your clients: When is the best time to get out of the market? This is a very powerful question that you should ask those clients who may be at a standstill now that the markets have shaken up their accounts. Consider for a moment the three possible market scenarios and the common mentality of your clients:

  1. Increasing Market Scenario. When the market is going up, people don’t want to get out because they want to ride it up and make money. This is known as “the greed effect.” “No reason to get out, let’s just keep watching our accounts grow.”
  2. Decreasing Market Scenario. When the market is going down, those same people now realize they would be selling at a loss. They may now have $900,000 in their account when they had $1 million just two weeks ago. The typical response? “I can’t sell now! I need to wait until I get back up!” They may even chase a moving target and say, “I’ll sell out when I get my money back.”
  3. Flat Market Scenario. The third possibility is a flat-line market. In this scenario, there’s really no pain and no need to make a change‑no urgency either way. “Why move now? It’s not hurting anything to stay in.”

So when we consider these three scenarios and understand how people respond to the different market conditions, it’s important to understand that this way of thinking is completely natural. This thought process is what I call “investing based on emotion‑not logic.” Most people are programmed to think this way about their investments. They naturally become emotionally connected to their current investments. Unfortunately, what clients really need to do is to make logical decisions and try to not get emotionally involved.

So how do you get clients to think logically? First, you need them to be aware of what’s taking place. Help them to understand the possible market scenarios and ask them that original question, “When is the perfect time to get out of the market?” Get them thinking about it. Next, put the money you’re discussing with them on the shelf for a minute, removing all emotional connection to it. Here’s an example of how you can do that:

“Mr. Client, let’s forget about this money for a moment and let me ask you a question. If you were to inherit some money today‑money you were not at all expecting but it just popped up and now it’s yours‑if this happened, where would you invest it today?”

Oftentimes, if you’ve previously proposed a “safe money strategy,” such as one including fixed or fixed indexed annuity components, clients will tell you “I’d put it in this type of plan that you’ve shown me.” Given today’s volatile market, you can even ask them, “What about the stock market. Up one day, down the next. Would you put it there?” The vast majority of the time, the client will reply, “No way!” You might even ask them, “Of this new money, how much of it would you like to be at risk in the market, and how much would you like to keep safe?” With any of these questions, the client is now thinking more logically as opposed to emotionally and that will help them make better decisions with their money.

The final step is to really point this out and help them to see that they should treat their current money in the same way they do their inherited money.

Help your client make this connection with one final question: “After seeing how much emotion can get in the way of your decision making with money, why wouldn’t you treat your current money the exact same way you did with the money in our exercise?”

Give this a try with clients over the next few weeks. With Wall Street wreaking havoc on retirement accounts, you should get plenty of opportunities to hone your skills. 

For more from Shawn Sparks, see:

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