Winston Churchill Copyright Keystone, Getty Images

The Ghost of Markets Past: Investors Need to Remain Wary

As advisors, we have a responsibility to help temper our clients’ emotions, both on the downside as well as the upside.

It has been nearly 10 years since the 2008 financial crisis, but for many it is all but a distant memory. This isn’t surprising, given that asset managers and investors alike have seen the market steadily recover, then “catch fire,” since its historic drop. In fact, it’s recovered so much over the last several years, even the most bearish investor exhibits some market optimism.

As the major indices cross into new record-high territory seemingly every day, advice-driven investors have begun asking their advisors about taking on additional portfolio risk. Their thinking is that since a rising tide lifts all ships, exposing themselves to more risk may very well equal a big payday down the road.

While this all sounds good from a theoretical standpoint, the reality is that nothing erases the pain of market losses quicker than years of market gains. Euphoria notwithstanding, there’s a cautionary lesson to be learned from the travails of 2008. As Winston Churchill famously said, “Those that fail to learn from history are doomed to repeat it.”

As advisors, we have a responsibility to help temper our clients’ emotions, both on the downside as well as the upside, helping them adhere to the long-term plans we’ve put in place for them. Often, these can be difficult conversations, particularly when markets are on the rise and clients feel as if they’re being restrained from upside participation.

What follows are some pointers to help advisors frame client conversations related to staying the course.

  1. Staying the Course Means Just What It Says
    Staying the course may be one of the most frequently used investment terms in recent memory, but it makes sense to recall this phrase when one’s emotions are at odds with rational decision-making. Staying that course refers to down markets as well as up markets. As advisors, we’ve presumably created a portfolio that’s sensibly allocated to stocks, bonds and alternatives that should help clients participate in the upside, while limiting the downside.
  2. Taking on More Risk Isn’t the Safest Decision
    It should come as no surprise that some clients believe taking on more risk will pay off in the long run. With the stock market doing so well and new investments like bitcoin grabbing headlines, many clients have developed a fear of missing out on new opportunities even if they may not be the most prudent decisions. This anxiety among clients may be motivated by the idea that taking on more risk could result in a big payoff. Regardless of market conditions, advisors need to regularly speak to their clients about their risk exposure and how much risk is appropriate.
  3. Focus on the Now
    Clients come to us to help them make better financial decisions. To accomplish this, advisors need to encourage their clients to divert their attention from past mistakes or concerns they have about the future and focus instead on what they need to be doing in the present to accomplish their goals. Everyone will have a different approach to this depending on their relationship with the client, but the idea is to start having end-investors think more objectively in real time about what they want their money to do for them and their family.
  4. Define Financial Goals Clearly
    One popular way to start the goals conversation is to segment the client’s financial objectives into both short-term and long-term strategies. By parsing them this way, advisors can control their client’s risk exposure and ensure that any short-term, ad hoc investments don’t interfere with what the client is hoping to accomplish in the long-term.
  5. Define Success the Same Way as the Client
    Success is an interesting word for financial advisors because every client has a different definition of what it means. Some clients may be capitalizing on their investments but still desire more, while others may simply be focused on the volatility they see in the short term instead of their overall long-term performance. Whatever the case may be, in order to help your clients be nonemotional, you need to have a solid grasp of how they interpret success. Once you do, you’ll likely find you have a better understanding of their long-term goals and what’s driving their emotions.

Collectively, we as advisors have learned a lot since the 2008 financial crisis. We can’t afford to let a market upswing, no matter how prolonged, give clients a false sense of security. Similarly, we need to constantly remind clients that their personal success is ultimately determined not only by the right investments, but also by having the right investing mindset. By employing some of the methods above to help your clients visualize their goals, avoid unnecessary risk and stay focused on the present, advisors will have an easier time connecting with clients, keeping them on track to achieve their goals and achieve their individual definitions of financial success.

Mark Stevens is a Financial Fiduciary, Senior Partner and Managing Director at Snowden Lane Partners.

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