By the time you read this article, clients will have their December account statements in hand. Expect calls.
Emotion often overrides logic. We think with our hearts, not our heads. The market is driven by fear and greed. Here are some things advisors don’t obsess about, but clients do.
1. 2019 is the 90th anniversary of what? At some point, someone on TV will helpfully remind listeners that 2019 will be the 90th anniversary of the Crash of 1929. This event led into the Great Depression. Some TV commentators will probably ask different guests: “Could it happen again?” Somehow, someone will give an answer that really scares people.
Thoughts: Things were a lot different then. Contrast how buying on margin worked, then and now.
2. Points matter. Many people watch the Dow Jones industrial average. It was up over 1,000 points one day in December. It was down over 600 points on Jan. 3. Although the percentages are smaller, big numbers scare people.
Thoughts: On Oct. 28, 1929 — Black Monday — the market was down 38.33 points. However, the Dow closed at 260.64, so that was a decline of nearly 13%. The Dow is about 100 times higher today. Oct. 19, 1987, brought the Crash of 1987, when the Dow fell 508 points to 1,738.64. That was a 22.61% decline. Percentage-wise, recent declines are small by comparison.
3. Percentages matter. Fortunately, many investors do think in percentage terms. A 250-point drop represents a 1% move if the Dow was at 25,000. However, clients have been seeing moves of 2% or more in the course of a day. When they think about interest rates they could get on Treasuries, a one-year T-bill yields about 2.60% as of Tuesday. They see the market wiping out wealth in a day that it would take a year to earn in the fixed income market.
Thoughts: The flip side has worked in their favor for years. The market might gain more in a day than fixed income could return in a year. (Rates were lower then.)
4. Guess who hasn’t been saving? Clients have short memories. They think about the great returns they were earning in the stock market for the past eight-plus years. Many probably made the mistake some private or public pension funds might have made, when they neglected to make annual contributions before the Crash of 1987. They rationalized they were ahead of the game. You probably have clients who didn’t make the retirement savings payments you suggested, because their assets were growing faster than projected. When the market declines, they are suddenly far behind.
Thoughts: Discipline yourself to continue saving. If things are going well, remind yourself how much more money you might be making. Maybe you could retire earlier than planned! That’s a good motivator.
5. Paper profits. Suppose your client has a $2 million portfolio, primarily in stocks. Every month the market goes up 1%, their statement shows a $20,000 gain. That’s $240,000 a year! That’s also a 12% annual return, which isn’t sustainable in the real world. However, they told themselves, the good times can last forever. They took on extra debt, buying stuff they really didn’t need. Then reality struck.
Thoughts: Christmas is over. Back to reality. Time to get with the program. Stop spending on silly stuff; start saving again.
6. The commodities analogy. It’s been said before you invest in commodities — where you can lose more than your investment — you should put cash in a bowl, set it on fire and force yourself to stand with your hands behind your back. Clients feel watching stock market declines is similar. “I didn’t do anything wrong. Why is this happening to me?”
Thoughts: The stock market isn’t closing forever at 4 p.m. today. It’s an ongoing process that often works in cycles. Burning money is forever. You can’t put it back together. As long as you stay invested, you are still in the game.
7. Lack of responsibility. People on TV play up market volatility. (It soars, it plunges.) They don’t take responsibility for their remarks after the fact. There’s no “How about that? The market bounced back! Guess we were wrong. Sorry to have scared you.”
Thoughts: Taking advice from people on TV is similar to someone not knowing you personally, telling you what to do. The TV programs make a concerted effort to explain “This is not advice.” Advice comes from an advisor who knows you.
8. In a perfect world, none of this should be happening. The economy is doing well. Oil prices are low. (People who drive or buy heating oil like low prices.) Unemployment is down. Wages are rising. The Fed is on the ball, keeping interest rates in check. So why is the market going down?
Thoughts: It’s a mistake to assume fundamentals don’t matter anymore. If you can take the long view, let the market get its troubles out of its system.
9. You’re the expert. Why didn’t you see this coming? In life, we want a villain to blame. You’ve heard the accident lawyer ads on TV. Somehow, we are not at fault. There are market declines. Difficult to pin blame on any one person. Then there’s the advice they receive. It comes from you, their advisor. Why didn’t you see this coming? It was all so clear (in hindsight.) Among the many commentators on TV, they hear one who says he predicted a decline. By their logic, you should have known this, too.
Thoughts: You’ve probably been beating the asset allocation drum for months. Without saying “I told you so,” this could be a teachable moment for why we should take a good look at asset allocation. If your client has long-term goals, it’s still early in the game.
10. Remind me again, what is your job? Clients often imagine an advisor is similar to a police officer who sees a truck hurdling towards a little child crossing the street. He leaps, he grabs the child, and he deposits her on the sidewalk. The child is unharmed. Some clients assume an advisor’s job is to time the market (the truck traffic) and lift the children (clients) out of the road.
Thoughts: Timing the market doesn’t work, because it can turn on a dime and head upward, too. The advisor’s job is to understand a client’s risk tolerance and long-term goals and to keep them focused. In this case, you are like the police officer who talks a jumper off the ledge and back into the building.
It hurts to lose money. Since a security is only worth what you can sell it for now, paper profits and losses are real profits and losses. As their advisor, you can help identify what’s getting them scared and try to calm them. Although clients don’t think about actually paying for it, hand holding does have a value. However, at the end of the day, it’s their money. They can do as they choose.
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.