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2022 Envestnet Asset Manager Awards

How Advisors Can Help Clients Overcome Their Biggest Investing Worries

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What You Need to Know

  • Global conflict, inflation and rising interest rates top the list of investor concerns now, according to Morningstar.
  • Advisors should try to make sure their clients don't sell off all their risky investments or freeze and not do anything.
  • Alternatives are a better investment choice now than fixed income because alts have less of a correlation to the market.

As challenges including the Russia-Ukraine war, high inflation and supply chain constraints continue, compounded now by rising interest rates, there are several steps advisors can take to help their clients overcome their top concerns, according to Dan Kemp, global chief investment officer at Morningstar Investment Management.

Although the worst of the pandemic may be behind us and society is returning to something close to normal, investors remain concerned about lingering challenges like inflation possibly getting even worse, he told the Envestnet Advisor Summit in Charlotte, North Carolina on Wednesday, during a session called “Navigating Investor Concerns in 2022.”

Clients are “full of worries” and topping their list of concerns in 2022 are global conflict, inflation and rising interest rates, he said.

Stay on the Rollercoaster

Those are all important concerns that advisors must take into account but none of them is the most important issue, he noted, adding: “The most important thing is whether clients are on track to meet their goals,” especially with short-term losses in their portfolios that are part of an “emotional rollercoaster” for them. “It’s easy to forget how stressful investing is,” he added.

“Our shared goal is to keep them on the path to where they want to be” and it is crucial to address clients’ concerns and try to get them to avoid making investment mistakes.

Kemp guessed that most clients are likely not looking to take more risk now. But he said: “Prices are lower. It’s a far better time to take more risk now than it was a year ago.”

Many investors “want to get off the rollercoaster and not invest anymore [and] we know that’s disastrous because once people get off they’re very, very bad at getting back on,” he explained. “Their goals can become completely unattainable if they jump off at the wrong point,” he added.

Addressing Clients’ Common Concerns

Addressing each of the three top investor concerns, he said first: “The impact of geopolitical events is entirely unpredictable … I have no idea what’s going to happen next in Ukraine.” He guessed that very few people aside from Russian President Vladimir Putin do, he added.

The future overall, meanwhile, is uncertain and could bring any of a huge range of outcomes, he said.

The best way to combat geopolitical uncertainty is to create a robust, diversified portfolio for each client that can deal with all four market environments (low inflation, high growth; high inflation, high growth; low inflation, low growth; and high inflation, low growth), he explained.

To combat inflation, advisors should use a flexible, unconstrained investment approach, he said, pointing out all Morningstar portfolios are managed with a valuation-driven approach that helps mitigate the impact of inflation.

To combat rising interest rates, he said, investments should factor in high interest rates. Historically, value has outperformed growth during environments of higher interest rates, he noted.

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So what’s best now are positions in value-oriented sectors including energy and financial services, and high-quality businesses with economic “moats” that tend to insulate them from inflation via greater pricing power based upon consumer loyalty and the ability to negotiate favorable terms with suppliers, he said.

Meanwhile, alternatives may be a better choice than fixed income now. After all, alts are less affected by rate hikes because they have less of a correlation to the market, he pointed out.

3 Predictable Patterns of Behavior

There are three predictable patterns of behavior during times of market volatility, he also said.

First is a fight in which investors try to take control and “trade through” the turbulence and there is an increasing reliance on short-term predictions of market sentiment, he noted.

More dangerous is flight, in which investors sell their riskier holdings to reduce volatility in their portfolios. Although they may benefit in the short term, goals are endangered as investors fail to re-invest, according to Kemp.

The last type is freezing and doing nothing, while trying not to look at their portfolios, while some enter “analysis paralysis,” he said, noting that can lead to a failure to make changes when they are required, reducing future returns.

Guiding Investors’ Responses

There are also four keys that should guide responses to economic and market trends by advisors and investors, he said.

First is staying true to the process. In other words, investors should be long-term and valuation-driven, focused on ensuring appropriate diversification to deal with varying economic and market conditions.

They should also recognize uncertainty. There is no advantage over other investors in predicting the future and times of uncertainty require a significant margin of safety, according to Morningstar.

Review fundamental values by conducting continuous research on markets potentially affected and doing an annual review of model assumptions.

Implications for positioning also must be considered. Uncertainty around fair values implies portfolio robustness will be especially important. That is why Morningstar continues to review and evolve portfolios to ensure advisors have responded in a measured way to shifts in relative attractiveness, he noted.

(Pictured: Dan Kemp, global chief investment officer at Morningstar Investment Management; Photo by Jeff Berman)