They are watching TV news. They see wildfires in the West, heavy rains in the South, heat waves in the Midwest and an early start to the hurricane season in Florida. They feel we are at a tipping point. 
1. Climate change.
Opportunity: They see this as a global problem that needs to be solved. As their advisor, you see this as a future trend. Big money will likely get behind energy alternatives. What is your firm's research department saying about solar energy, wind power, electric cars and other alternatives to fossil fuels? Is there a mutual fund or ETF focusing on this trend?
Credit: Shutterstock
One of the biggest challenges financial advisors face is recency bias. How do you get clients to rebalance their asset allocation when the stock market keeps going up? Conversely, your client might want to panic-sell, or balk at buying a stock that's "on sale" in a down market.
It’s a tough problem to tackle. Here are some ideas that are, well, seasonal.
Start by establishing common ground. Will your client admit the weather consists of four seasons? That seems pretty obvious. If you live in the southern states, you might not see snow, but you know the days get shorter and temperatures get cooler as winter approaches. The coastal southern states also experience hurricane season. Weather patterns are cyclical.
The stock market is cyclical too. We know it moves between bull and bear markets. Investors tend to be optimists. We believe American companies will continue to innovate and the American consumer will continue to spend. We hope things will get better, not worse. Yet we know it pulls back and stays down from time to time.
Let us consider 10 analogies about weather and the markets.
1. No one believes winter is not coming.
Would anyone say winter will not happen? The days are getting shorter. It might seem like the weather is staying warm, but the weather gradually gets cooler. The trees are losing their leaves.
Clients realize the seasons are cyclical. They should understand the stock market is cyclical too.
2. We prepare for winter.
It does not take us by surprise. We store away the outdoor furniture. You client closes up their swimming pool. They get out the Christmas decorations. They start up the snowblower. They hope for the best, but prepare for the worst.
Investors should look at rebalancing their portfolios, bringing them into line with the model for their risk tolerance level. Are they carrying a margin balance? Are they overweighted in certain sectors?
3. History is a guide, but not a guarantee.
It is normal to think back to last winter and the one before. Was it a wicked winter or a mild one. When was the first snowfall? Did you experience storm after storm or only one major snowfall?
Advisors talk with clients about previous pullbacks they have experienced together, reminding them last year’s experience will not necessarily be this year’s experience. You need to be prepared.
4. Power outages happen.
Power companies have been dealing with this problem for decades. You often have overhead power lines strung between wooden telephone poles. Trees bring down those wires. Now you have two problems: snow on the roads and no electricity. The power company has planned in advance and gets their trucks out to get power back on.
There are times when the stock market goes down further and faster than you expected. Often, a recovery (or at least a partial recovery) happens quickly. Some stock exchanges have "circuit breakers" that pause trading when stocks fluctuate too rapidly.
5. People buy generators.
This is another aspect of preparation. We expect life to go on, but we realize it might be disrupted. We do not want to be taken out of action. If you live in an area where trees take out overhead power lines, many people buy a backup generator.
Many investors want to stay invested. They buy defensive stocks. These are names that consumers tend to favor even when the economy slows.
6. You do not know when the weather will suddenly get warmer.
Sometimes a big storm is followed by a warm-up. You cannot explain why, but it happens. The snow on the ground doesn’t freeze solid, it melts instead.
The stock market often changes direction. Statistics show if you were on the sidelines for the first day or two of the rebounds, your return is much lower. It makes the case for staying invested, not trying to time the market.
7. We know spring is coming.
You wake up in the dark. It is cold outside. There is snow on the ground. In the city, this takes away parking spaces. When a storm is in the forecast, the supermarkets are jammed. Your hardware store has run out of rock salt. All this gets depressing.
Dec. 21 is the shortest day of the year. After that, days get longer. Spring is coming.
The stock market might be down. The economy has slowed. Company earnings might be lower. You cannot think of any reason why this will get better anytime soon. Remember, the stock market and the economy are cyclical. Any bargains out there?
8. Some areas get worse weather than others.
You watch the news in the morning. Some places around the Great Lakes or Upper New York State are getting lots of snow. You are silently thankful.
The S&P 500 index is made of 11 sectors. Some get hammered harder than others.
9. TV news has sensationalized weather.
Weather has become news. Personally, I think the networks, realizing they need programming, have realized sending an on-staff presenter out to report on a snowstorm is a lot cheaper than filming an episode of a drama or situation comedy. The stations create a sense of immediacy and anxiety.
Financial news on cable TV has been reported this way for years.
10. Cities are good at dealing with snow.
When it stops snowing, you are responsible for shoveling your own sidewalk. But you are not responsible for shoveling out the streets and intersections. The city or township does that. The state clears the highways. They have equipment, but they hire contractors too. They have been doing it for years and know how to get it done efficiently.
This is an analogy concerning money managers. They are the township snow clearing crews and the hired contractors. They have seen these conditions in the stock market before. They often rely on analytics to take the emotion out of dealing with the ups and downs of the market.
10. Seasons are reversed below the equator.
Is it snowing in Australia during December? Probably not. Why? Because the seasons are reversed.
The stock market is not confined to the U.S. There are stock exchanges all around the world. Stock markets are not all tied into the exact same cycle. They are often tied to the local economy. If the stock market is falling in the US, it might be on the upswing in other parts of the world.
If you can build common ground with your client by discussing the cyclical nature of weather and seasons, you should be able to make progress concerning the cyclical nature of the stock market and the economy.
© Touchpoint Markets, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to TMSalesOperations@arc-network.com. For more information visit Asset & Logo Licensing.