When stocks are collapsing for no clearly discernible reason, advisors have to reassure their clients
With major stock indices losing huge chunks of value and even seeing a total wipeout of their gains for 2018, the words “volatility” and “uncertainty” are likely being thrown around a lot more frequently than they have in recent years. For many clients with equity exposure, another word might spring to mind: chaos.
As the violence in the markets puts investors in fight-or-flight mode, it’s time for advisors to provide value with some much-needed financial coaching. “Clients are paying for advice,” noted Bryce Sanders, president of Perceptive Business Solutions, in a ThinkAdvisor article. “They want some answers, although they logically reason there don’t seem to be any. All that’s obvious is some people somewhere are taking money off the table.”
For clients with mutual funds or separately managed accounts, Sanders recommended that advisors do research on the money managers behind them. If the managers have a long track record, particularly one that shows an ability to weather market downturns, it would go a long way toward reassuring clients. For clients who own individual stocks or ETFs, it can help to point out strong fundamentals and high-quality underlying securities.
Another useful piece of advice for agitated clients would be to stop watching financial news channels. “The people on TV tend to sensationalize things,” Sanders said. “If the market turned on a dime and headed back up, some people on TV would probably behave as if this never happened.”
It may also be worthwhile to share any viewpoints the firm might have, particularly ones from analysts who spend significantly more time poring over market charts and data. Letting clients know where they can see or read those perspectives firsthand could provide essential reassurance and guidance.
With news of whipsawing stock prices, clients may also forget that equity investing is about time rather than timing. That means having a long-run strategy based on convictions that the economy will expand, technology’s influence will continue to grow, or other trends that are expected to play out.
“This isn’t blackjack, where you walk away from the table if luck turns against you,” Sanders said. “Show the chart showing performance of the stock market over a 70-plus year period. It had its ups and downs … As long as the economy did well, the market did well in the long term.”
The same thinking can apply in cases where companies report better earnings, but are still suffering declines in their stock prices. While that might be the reality for the moment, looking at the long term shows that companies with strong earnings generally deliver better results in year-over-year comparisons, which should spell good news for their stock prices.
Finally, Sanders recommended that advisors monitor year-to-date performance across different sectors. “Investors might be taking money out of some sectors, but it’s likely going into others,” he said. “You’ll likely sit tight and try to ride out the storm, but look to see if sector leadership is changing.”
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