Help clients beat the jitters when the markets shake

August 20, 2019

 

When financial markets hit periods of volatility, you know clients will call with questions. Is this the right time to sell? Why are my account balances dropping? Shouldn't you be doing something?

You know you will tell them about the need to stick to the financial plan you developed together. But sometimes clients remain nervous about all the market noise in the news.

The stock market downturn at the end of 2018 provided an instructive case study on what can happen if investors make changes just when the market situation starts to look dire.

The one-page, end-client-approved brief, offered in the PDF link below, shows that a hypothetical, diversified 60% stock/40% bond portfolio that started with $1 million on November 1, 2018, would have lost 5.7% of its value by Christmas Eve. Yet that same portfolio would have jumped to a 4.2% gain just two months later.

As a result, an investor who sold the portfolio's assets at the Christmas Eve bottom would have nearly $100,000 less than one who stayed the course.

Staying the course can pay off; abandoning course can be costly

The global stock market drop in late 2018 offered a lesson in investor behavior.

The global stock market drop in late 2018 offered a lesson in investor behavior

Sources: Vanguard calculations, based on data from FactSet, as of February 28, 2019.

Notes: U.S. stocks represented by CRSP US Total Market Index. U.S. bonds represented by Bloomberg Barclays U.S. Aggregate Float Adjusted Index. Global stocks represented by FTSE Global All Cap ex US Index. Global bonds represented by Bloomberg Barclays Global Aggregate ex-USD Float Adjusted RIC Capped Index. The performance of an index is not an exact representation of any particular investment, as you cannot directly invest in an index.

This is just a recent example of how behavioral coaching, as outlined in Vanguard Advisor's Alpha®, demonstrates the extra value you bring as an advisor. Our research shows that helping clients stick with their financial plan at times when they may be tempted to abandon it is the most valuable service you can provide.1

Help your clients amid volatility

When discussing market volatility with your clients, help them remember the value of:

  • Having realistic expectations. Vanguard Investment Strategy Group anticipates higher financial market risks and lower financial market returns over the near and medium term.
  • Staying diversified. A great way to insulate a portfolio is to have exposure to stocks, bonds, and international markets. Bonds can act as ballast during downturns. International exposure provides access to markets that may be generating positive performances when others are falling.
  • Tuning out the noise. There's an adage of never checking accounts when stocks are tanking. It's smart advice. As the graphic above shows, making a decision based on a recent market event often results in a mistake.

Markets become volatile. That's a given. When they do, this brief may help clients consider the potential downside of emotionally reacting to market noise by selling investments or trying to time the markets.

Downloadpdf

1 Francis M. Kinniry Jr., Colleen M. Jaconetti, Michael A. DiJoseph, Yan Zilbering, and Donald G. Bennyhoff, 2019. Putting a value on your value: Quantifying Vanguard Advisor's Alpha®. Valley Forge, Pa.: The Vanguard Group.

 

Our insights straight
to your inbox

Our insights straight to your inbox

Receive our latest Advisor's Digest
research
and commentary sent the
first business
morning every week.

A weekly digest of our latest research and commentary. Topics include the economy and markets, portfolio strategy, ETFs, and practice management.


Fund openings/closings, fund manager changes, dividend distributions, webinars, and other events you might want to know about.



Already registered? Log on to
manage your
email subscriptions.

Advisor's Digest

for September 16, 2019

Advisor's Digest for September 16, 2019

Advisor's Digest

for September 16, 2019