When I travel around the country on speaking engagements, I hear more and more stories of investors who have vowed to abandon stocks forever. I also hear tales of frustration from registered reps who are having a hard time persuading them that investing in equities remains a good idea.
We are talking about the same investors, mind you, who wanted their advisors to move all their assets into stocks a few years ago. Now, hard-bitten by the market downturn, they decide they don't want to go through it again. What they don't realize is this: Removing their long-term money from the market now is probably as foolish as over-concentrating in equities was a few years back.
In a most mundane example of how non-stock investment won't necessarily help cautious investors, money market yields are dropping below 1 percent. Investors who try to preserve wealth through such instruments will fail because inflation is running at more than twice that figure and could increase when the economy strengthens.
So what to do with these people? How do you react when they come to you for advice, but don't like it when you tell them of the tremendous upside potential of the equity markets? Here are some analogies that might help them see the light.
Remind your clients that in winter we find it difficult to buy summer clothes because our bodies tell us it is cold and we will freeze to death in tank tops and short pants. Buying summer clothes at beaten-down winter prices runs counter to what our bodies tell us, but it's the smart thing to do. So tell them to stock up on “summer stocks” now, before the weather changes and prices rise.
A Healthy Regimen
Disciplined investors will always have some long-term investments in stocks. And they will be sure to rebalance when the percentage moves out of their target range. Here's an analogy you might use to persuade your clients of the need for such discipline.
Let's say our discipline — based on the advice of a doctor — is to take a mile-long walk every day. We may want to opt out in busy times, arguing that we'll resume the program when things settle down, maybe we'll be okay if we walk two miles a day next year. Most people will quickly see why that doesn't work: To suspend exercise is to invite a permanent cessation and risk losing the benefits of the program.
So it is with a disciplined approach to investing. Stay the course. Stick with the program. Override what your fancy or short-term demands tell you to do. It's good for your long-term fiscal health.
Roll the Dice
Along with discipline, investors need to recognize that investing in stocks is risky — but it's a calculated risk. In addition, the chances of rewards for the risk taken are enhanced when an investor stays in the market over long periods of time.
Suggest your clients view the stock market's gyrations as something like a die, but with more than six sides. This object has more positive sides than negative sides. Each time market forces roll this outsize die, you take a chance on the outcome.
From 1995 through 1999, market forces succeeded in achieving an amazing run in which the die landed consistently on positive numbers. Risk appeared to have disappeared, but the die still had negative sides to it; we just hadn't seen them for a while.
Recently we ran into a spate of negative results. As the die is rolled for the next quarter or year, we take the risk that it could again land with a negative side facing up. But our chances for seeing a positive number next time are still greater than the chances of negatives.
Remind your clients that historically the stock market's positive numbers have outweighed the negative numbers over long periods of time. There's every reason to believe that they will continue to do so in the future.
Armed with these three analogies, you might be better equipped to convince your clients to avoid giving in to understandable emotional behavior based on the recent scary state of the equity markets. With your encouragement, they can maintain a disciplined approach that allows them to accept the appropriate amount of calculated risk by investing in equities when it is cold, possibly inconvenient, but almost assuredly the best long-term bet.
Ernie Ankrim is chief investment strategist at Frank Russell Company.