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Clearing Up Client Confusion Amid Market Turmoil

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Normally, I receive very few client phone calls when stocks decline. I jokingly think of myself as being like the Maytag repairman in that sense (remember the old TV commercials?). However, during the past few weeks I’ve had calls from clients who were a little nervous about the markets. In this post, I’ll share a few things I’ve been telling clients to allay their fears. 

During times like these, perspective is a wonderful thing. Experienced advisors understand this very well. Even a new advisor understands that stocks contain risk and will rise and fall to a greater extent than many other financial assets. Clients, on the other hand, as intelligent as they may be, typically don’t possess this perspective since this is not their primary vocation. In short, they haven’t spent hundreds or thousands of hours studying the financial markets.

Therefore, when stocks fall, at the point where they reach their pain threshold, their emotions become more dominant in their decision making. It’s entirely understandable why investors often head for the exits when stocks fall. Conversely, when stocks rise, and especially after rising for a while, they may become more comfortable and invest more.

Numerous surveys have shown that the retail investor tends to load up near the top of a bubble and get caught when prices fall. This is why clients can benefit from working with a good advisor. 

NOTE: As I write this, the Dow is down -9.65% for the year. It was down 12.1% after it closed on August 25, 2015. 

What can you tell clients? Try showing them a long-term chart of the Dow or some other U.S. stock market. Point to the times stocks bottomed and ask, “Would you rather buy when prices are low (i.e., on sale) or when they are high (point to a peak)?”

I like to use a simple example to help drive the point home. Assume you begin with a portfolio of 50% stocks and 50% bonds. Further assume that stocks decline over some period of time. As stocks fall, they become a smaller portion of the portfolio. Eventually, stocks will hit bottom (they always do) and rebound. At the very bottom, your stock percentage will be at its lowest point. If you simply buy and hold, after stocks bottom, your portfolio will rebound, but not as much as it would have if you had increased the percentage of stocks on the way down. Even if you don’t increase it, consider maintaining the original 50% allocation.

Here’s the point. When the rebound comes, if you have more stocks in the portfolio, the portfolio will perform much better than it would have if you had left it alone. You might even ask clients, “How much horsepower would you want in your portfolio when stocks hit bottom?”

After all, we prefer to buy cars, furniture and even food when it’s on sale. Why not do the same with stocks? Perhaps they’ll see things differently.

Thanks for reading and have a great week!

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