In May, the Spectrem Millionaire Investor Confidence Index saw its biggest one-month drop in its 13-year history. Almost 40% of millionaire investors said they intend to avoid investing any additional funds in June, which is the highest percentage of investors saying they are staying on the sidelines since December 2013.
Clearly, investors are concerned about the market and believe that staying on the sidelines is the only way to protect their financial futures.
Prudent industry professionals know that attempting to time markets this way is folly, but it identifies a real problem: Advisors may not be doing enough to help investors understand risk and how it affects their financial future.
Risk, and a willingness to take some level of risk, is an essential element of success in virtually any endeavor, not just financial planning. So, we’re borrowing inspiration from one of the most successful modern risk takers, Alex Honnold, the world’s best free solo climber. Just last month, Alex stunned the world when he climbed El Capitan, a 3000-foot vertical rock formation in Yosemite National Park, with absolutely no equipment or harnesses of any kind.
Let that sink in for just a moment: a 3000-foot vertical climb with no equipment or harnesses. Alex is an extreme risk taker. While we aren’t advocating that investors take the same kind of outsize risks with their finances, there are lessons to be learned from someone who pushes the boundaries of risk taking. Alex is able to do so because he has both a specific mental approach and philosophy that guide his actions and allow him to see past the life-or-death circumstances in which he puts himself. Working with advisors, investors may be better able to embrace precipitous conditions and move confidently forward in pursuit of their financial goals.
WWAD: What Would Alex Do?
Take His Time
Alex Honnold did not take on El Capitan on a whim. It took him nine years to work up to this achievement, during which he worked with purpose and patience toward his ultimate goal.
Advisors need to remind investors to do the same. Day-to-day market fluctuations are a distraction from an investor’s actual goal: achieving their personal objectives. Investors often concern themselves with beating benchmarks, but the real risk they face is not reaching their individual goals: wealth accumulation, educational funding or a lasting, comfortable retirement.
So, one crucial role of the advisor is to coach an investor to take their time and think big picture.
Defining a clear financial plan that focuses on elements that investors and advisors can control may provide the best opportunity for success in meeting those long-term financial objectives. On the asset side of the balance sheet, these controllable elements include asset allocation, all costs, tax considerations (where applicable) and the long-term impact of inflation.
On the liability side, the focus should be on formulating a realistic budget for future spending plans, while understanding how current and future capital and income may affect long-term goals. Other considerations include making appropriate use of estate planning, trusts and insurance.