October has often been a difficult month for stock market investors. Getting through is like trying to get past Boardwalk and Park Place in the game Monopoly when another player has built hotels on them. Clients get upset when the market declines. They worry “this time it’s different.”
Why Is Your Client Scared?
Market declines are an opportunity to show your value as an advisor. A robo-advisor isn’t doing any hand holding. Self directed clients have only themselves to blame. No one wants that.
1. Sudden moves scare people. It’s been said the market goes up like an escalator and down like an elevator. This gets magnified by those helpful people on the financial news cable channels.
2. Points scare people. A drop on the Dow Jones industrial average measured in three digits is scary. They forget the Dow isn’t at 7,000, 14,000 or 21,000. It was up around 26,000 and setting new highs. The percentage decline may be lower, but the points get their attention.
3. They made other plans. The Dow bottomed out at 6,443 on March 6, 2009. Its been generally moving upward for nine years. It was 18,332 the day of the November 2016 election. On Oct. 3, 2018, it set new highs at 26,828, almost 8,500 points higher. Your client has assumed these dramatic gains would continue forever. Reality has intruded.
4. They’ve seen this movie before. The Dow was 14,164 on Oct. 11, 2007. Seventeen months later, it bottomed out at 6,443, a 54% decline. Your client thinks the new high we just hit was the start of the sequel.
5. They think the smart money bails early. You’ve preached “time in the market” vs. “timing the market.” They think the Wall Street pros get out early, leaving the investing public holding the bag.
6. They’ve got a know-it-all friend. Someone in their social circle is a Debbie Downer. They’ve continually predicted the good times can’t last forever. Yet even a broken clock is right twice a day. They believe their friend has predicted a drop in the market.
What Can You, the Advisor Do?
A lot of these points are obvious. You know them. Your clients should know them. Everyone needs to be reminded.
1. You call first. Don’t wait for their anxiety level to reach the point they pick up the phone. Do it first.
Rationale: You are letting them know they are an important client. You are on top of things.
2. We are all in this together. They invest. You invest. They had a bad day. You had a bad day. You feel their pain.
Rationale: You are not a smiling croupier taking away their chips. Their market losses didn’t move into your pocket. You are on the same side of the table.
3. Provide leadership. No one knows where the market is going. You can’t predict the future. You can reiterate the reasons why they own certain investments, the experience of money managers in previous market cycles and scenarios of what could happen next.
Rationale: This is the hand holding part. You aren’t saying “I have no clue what will happen next.” You are focusing them on factors in their favor. You are showing your value as an advisor.
4. What’s changed? This is the “goes down like an elevator” part of the conversation. A certain stock went down 3%. Did management become 3% dumber overnight? Did earnings go down overnight? No.
Rationale: The fundamentals are intact. The stock is probably down because the rest of the market is down.
5. Think long term. They completed the financial planning process. You measure performance at set intervals, also known as Progress to Goals. Their retirement or their children’s college education is a goal on the horizon.
Rationale: They are long-term investors, not short-term traders. Those people are gamblers.
6. The market doesn’t move in a straight line. You’ve both looked at the chart showing returns over time of various investments. The small-cap and large-cap stocks usually top the chart. The line moves in a zigzag pattern. If it produced the highest returns and moved in a straight line, why would anyone invest in anything else?
Rationale: You’ve got ton keep your eye on the prize, putting up with bumps along the way.
7. Opportunities others are missing. It’s been said Wall Street is the only place people don’t buy when stuff goes on sale. You own good investments. Prices are lower. Make the case for adding fresh money.
Rationale: They might not take your advice, but they will remember you gave it months from now.
8. How’s the economy? The stock market is often considered a leading indicator for the health of the economy. How does the economy look? Unemployment is down. The Federal Reserve has gradually started raising interest rates, which they often do to keep the economy from getting overheated. The economy looks sound.
Rationale: Stock market valuations are often driven by company earnings. Those have been doing well as companies benefit from a growing economy. How are your stocks doing regarding earnings? Probably pretty well.
9. What’s the alternative? Assume the money that comes out of the stock market has to go somewhere. Is it going into real estate? The bond market? Gold? Oil? Probably not.
Rationale: Based on fundamentals and company earnings, the stock market is still an attractive place to be.
10. Sector rotation. The S&P 500 Index is made of sectors. Some do better than others. When markets decline, it’s useful to see where losses are greater or less than the decline of the overall average.
Rationale: It’s a good indicator where leadership will come from in the future.
11. Look around you. Some investors think the world is coming to an end when the markets decline. Look around. It’s not like 9/11. Are crowds on the street gathered in front of giant TVs watching the market? No. Has traffic stopped as people are transfixed? No. Everyone is going about their business. Life is normal.
Rationale: In the great scheme of things, market volatility is only one part of their lives. They have family. Friends. A job. These also need attention.
Advisors need to give clients advice. It’s in the job title. They need hand holding. Robo-advisors don’t hold hands.
Bryce Sanders is president of Perceptive Business Solutions Inc. He provides HNW client acquisition training for the financial services industry. His book, “Captivating the Wealthy Investor,” can be found on Amazon.