Every time the market drops, we hear from our nervous clients, and it's a challenge to come up with a different way of explaining the same answer.
Many years ago, long before I entered the investment business, I attended a luncheon sponsored by a local stock broker, Bob. He asked the audience why a person's investment portfolio performed better over the long term if they used a broker, rather than investing on their own. The audience responses included "because the broker knew more about the stock market," "because the broker's company had access to different types of investments," and so forth. Bob listened carefully to all the answers. Then he shook his head and said, "No. The reason is that when the client calls in a panic and wants to sell out, the broker doesn't let him."
And that, in a nutshell, is the most important role that investment advisors have--to help their clients stick to their investment plans.
We all know the truth of this, but as we enter the fourth year of this recession and "recovery" period, and the extreme market volatility that has accompanied it, it gets harder and harder to persuade some of our clients to stay in the game. Fortunately, most accumulators are comfortable with the volatility, even if they don't like it. Our biggest issue is with clients who are living off of their portfolios and, for us, it is the single women who are retired, widowed, or divorced who struggle the most. They experience a strong fear reaction when the portfolio declines, and even a few days of negative returns are enough to remind them of the extreme panic they felt in early 2009.
Understanding the Triggers
What do you say when your client pleads, "I just can't take it any longer. I want to get out of the market!"? We know she is having a strong, emotional reaction to something--panic at the decline in the value of her portfolio, fearful anticipation of negative news she heard on TV, or some other trigger. It is no longer enough to say, "Don't worry. It's fine." To calm her, you need to spend the time to explore her fears and remind her why she is in the market in the first place.
One really common misperception among our clients is when they hear that the Dow Jones has declined by 10%, they think that their entire portfolio is down by 10%. Our bellwether client, who calls every time there is a multi-day drop in the Dow, has to be reminded that her portfolio has only 30% invested in equities, with the balance in fixed income. In addition, her equities consist of broadly diversified asset classes, not just large U.S. companies. In any event, if you can explain that a 10% overall decline in equities represents only a 3% decline in her entire portfolio, it goes a long way to calming her fears.
Some Basic Storylines
Depending on what you hear from the client, you can tailor your discussion. Some possible talking points are:
• No one knows when a recovery will occur. If you bail out now, how will you know when to get back in? By the time you hear in the media that the recession or bear market is over, stock prices will have already recovered and you'll miss some of the market's best returns. Just look at the second half of 2009.
• You have an appropriate allocation in your portfolio to fixed income, which will cover your withdrawal needs for several years. You need to keep some equities to provide long-term growth to cover the inflationary rise of your withdrawals over time.