Let's pull off the band-aid, advisors: volatility entails loss. In volatile markets, it is not sufficient to provide subtle comforts and sugarcoat the truth. Rather, in order to defeat the twin monsters of hope for gain and fear of loss, we must arm our clients with a powerful concoction of historical data and the cold, hard truth.
The Fear of Loss: A Howling Wolf in the Night
Consider your client, who is hunched over their portfolio, their eyes haunted by red arrows. Headlines scream doom and gloom, feeding their gnawing fear of loss. Every dip feels like a personal failure, and every correction sounds like a warning of financial ruin. They're ready to abandon their plan in exchange for the fleeting comfort of cash under the mattress.
Shining a Light on the Darkness:
Remove the cloak of certainty: Be forthright. Unfortunately, losses are unavoidable. Show them the best and worst rolling CAGR returns over various timeframes and asset classes. It is important to note that even the most robust portfolios experience periods of negative growth. Accept losses as normal hiccups on the long road to wealth. It is important to note that losses (particularly in a balanced portfolio) may occur at different times than a cap-weighted all-stock index.
History whispers wisdom: Arm yourself with data on rolling worst-case scenarios. Compare their current anxieties with past downturns, showcasing how markets have always recovered and delivered positive returns over sufficiently long horizons. Share historical periods with both booming and busting CAGR figures, emphasizing the cyclical nature of investing.
Zoom out, take a deep breath, and refocus: Encourage clients to take a step back. Short-term market gyrations are distractions. Shift their focus to a larger canvas, displaying their portfolio's consistent upward trend over longer timeframes. This helps them gain perspective and detach from the emotional roller coaster.
The Hope for Gain: A Siren's Song on the Rocks
Now picture a client, eyes glazed over by headlines promising instant riches and skyrocketing returns. The siren song of hope for gain lures them towards speculative mirages, abandoning their sound strategies for get-rich-quick schemes. They gamble on the next hot stock, risking their hard-earned money for a fleeting dream of overnight success.
Silencing the Allure:
Temper expectations with reality: Ground their hope in data. Show them historical average market returns across asset classes, emphasizing the importance of consistent, long-term growth over unsustainable bursts of high returns. Manage their aspirations with realistic figures, focusing on slow and steady progress.
To this end, it is helpful to compare the S&P 500's three-year return from 1997 to 1999 to its three-year return from 2000 to 2002. From 1997 to 1999, the S&P 500 had an amazing average annual return of about 28% over the course of three years. It was an era of lofty hopes and seemingly endless possibilities. However, if we focus on the three years between 2000 and 2002, the image is very different. The average annual loss for the S&P 500 was roughly -16%. The market correction served as a sobering reminder that unsustainable high-return streaks frequently implode.
Risk and reward, a tango not a sprint: Explain the delicate tango between risk and reward. Higher returns come with higher risks, potentially jeopardizing their overall financial well-being. Encourage them to prioritize long-term stability over the thrill of chasing the next big thing.
Celebrate small victories, the foundation of success: Acknowledge and celebrate even small wins. These consistent gains, achieved through sound strategies, are far more sustainable and rewarding than chasing the elusive jackpot.
Managing assets is just one aspect of your job as investment advisors; you also act as guides, assisting clients in navigating the ups and downs of the market. You can give them the confidence to stick with it through difficult times by putting their expectations firmly rooted in past performance and highlighting the significance of steady, long-term growth.
Remember:
Transparency is the lifeblood of trust: Be open and honest about the risks and potential losses involved in any investment. Don't sugarcoat the truth; embrace it as a powerful tool for building trust and setting realistic expectations.
Communication is your compass: Tailor your message to each client's unique risk tolerance and financial goals. Use clear, concise language and relatable examples to explain complex concepts. Guide them through the storm with facts, not platitudes.