As 2016 moves into its final quarter, market headlines have proved far more volatile than actual asset prices, save for the first quarter of the year. The Brexit vote, and the vast amounts of energy expended attempting to dissect the Federal Open Market Committee’s decisions, have not yielded the results many industry pundits had predicted. All the while, addressing clients’ fear of the unknown has always stood as part of an investment advisor’s job description.
Rarely does reality exceed fear, and on the infrequent occasion that it succeeds, advisors possess an ironclad fallback for their clients: the investment process that clients believed was best suited to their needs and agreed to when they first signed on with their advisor. Even after the Great Recession, the worst financial crisis in 80 years, discipline has been rewarded as markets long ago took back their pre-crisis highs.
Shorter-term distractions like the current earnings season, bond yields in Greece and even presidential elections will not play a role in anyone’s long-term financial plan. However, succumbing to the short-term fear created by these noisy (as opposed to newsy) events can potentially derail a financial plan. The investors who sold in a panic in 2008 and never returned missed out on a tripling of the stock market. Not too many seven-year, 200% gains occur during the typical investor’s lifetime, and such opportunities cannot afford to be missed.
Discovering that clients maintained too much exposure to volatility after a large decline can lead to uncomfortable conversations and can increase the likelihood that they may take exactly the wrong action at an inopportune time. A sound financial plan and investment process, as well as a strong historical perspective, remain essential tools for any advisor striving to keep clients on the right track. ETFs can immensely help on such fronts.
In terms of a sound financial plan and investment process, ETFs offer fully transparent exposure to the broad market, a segment of the market or a particular strategy. Transparency is critical here in terms of offering simplicity to the advisory client. By virtue of their transparency, an investment portfolio of ETFs will allow for much easier conversations with clients and help them maintain focus on their suitable time horizon.
The S&P 500 and the Russell 1000 will always remain proxies for the broad market through good times and bad times. Although that seems incredibly basic, times of increased emotion like fear of a decline or anger toward a political event are exactly when clients need to hear from their advisor.
Many ETFs can offer a historical perspective by virtue of now long-standing track records. Such perspective can provide power for an advisor and comfort for a client, especially with the ability to look back at the previous bear market — or even the last two bear markets depending on the ETF — to see that the fund bottomed but then rallied to eventually reach a new high. While this may seem simplistic, the ability to provide visual evidence at times when rational thought is running low and emotion is running high can be a difference maker for managing client anxiety.
Additionally, smaller events can be blown out of proportion by investors. For example, the Sarbanes-Oxley Act in August 2002, which required CEOs to sign off on their company’s earnings, engendered genuine fear among the investing public, as odd as that may now seem. Yet through memorable and forgettable episodes, ETFs recovered and maintained the general tendency to, as investor Dennis Gartman might say, move from the lower left to the upper right.
— Read ETFs: An Easier Way to Roll Into Retirement, Experts Say on ThinkAdvisor.