Talk to clients about market downturns

January 27, 2020 | Vanguard Perspective

Talk to clients about market downturns

You know that at some point, markets will decline—possibly prompting questions and concern from your clients. It's a difficult position to be in when clients call in the midst of a downturn, second-guessing their investment strategies and diverting you from serving them in more productive ways.

As not only an advisor but also a coach, you can help clients put matters into proper perspective by proactively defusing their emotional responses to the markets' unavoidable dips.

Below are ways to help you have those proactive conversations, including links to customizable resources to share with your clients.

Explain the basics

Clients hear lots of financial terms referring to downturns bandied about by their friends, their colleagues, and the news media. Those terms may not always be used accurately or in the appropriate context, which can feed clients' worries. You have an opportunity to help clients by clarifying what the terminology actually means—and by offering a reality check for clients on the long-term significance of temporary downturns for their portfolios.

Downturns aren't rare events: Typical investors, in all markets, will endure many of them during their lifetimes.

Since 1980 there have been

Chart illustrating that since 1980 there have been 12 corrections (declines of 10% or more), 8 bear markets (declines of 20% or more, at least two months long), and 5 recessions (declines in economic conditions for two or more successive quarters—refers to declines in the broad economy rather than the financial markets, though the two can be linked).

Source: Vanguard.

1 Refers to declines in the broad economy rather than the financial markets, though the two can be linked.

Still, you know that clients can find these events traumatic simply in contemplating them. The good news: You can work to proactively dispel their dread by displaying empathy while pointing out the importance of maintaining a long-term view.

Ultimately, the most helpful thing for clients is that you focus on what you and they can control. You and your clients can proactively discuss the facts and their feelings and make a plan together for how to weather market and economic disruption.

Knowing that they are fully prepared should help clients have a more positive outlook.

Provide scenarios

If a picture is worth a thousand words, the investing examples you show clients could be worth a fortune to them. We can look back to the global financial crisis and Great Recession, the country's most severe financial shock since the Great Depression, for instruction. If a client had $1,000 invested in a balanced 60% stock and 40% bond portfolio through the last big upheaval—and didn't add a penny more—the client would have more than doubled their money a decade later.

Value of $1,000 invested on October 9, 2007 (pre-crisis peak) through June 28, 2019

Chart that shows the June, 2019 value of a hypothetical $1,000 investment made on October 9, 2007. If maintained as cash, the balance would have been $951 on June 28, 2019. If invested in a representative 100% bond portfolio, the ending amount would have been $1,378. If invested in a representative 60% stock, 40% bond portfolio, the ending amount would have been $2,215.

Sources: Vanguard calculations, using data from FactSet. All data as of June 28, 2019.

Notes: This is a hypothetical illustration. Balanced portfolio is represented by 60% S&P 500 Index and 40% Bloomberg Barclays U.S. Aggregate Bond Index; bonds are represented by Bloomberg Barclays U.S. Aggregate Bond Index; and cash is represented by Bloomberg Barclays U.S. 3-Month Treasury Bellwether Index. Past performance is no guarantee of future results. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index.

Mid- and small-capitalization stocks historically have been more volatile than large-cap stocks. Investments in bonds are subject to credit, interest rate, and inflation risk. High-yield bonds present higher credit risk than other types of bonds. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income.

Offer perspective—Including clients' long-term goals

In the midst of the longest equity bull market in history, clients can easily forget that volatility includes stock prices going down as well as up—and that such movement is quite normal. In fact, history shows it's practically guaranteed. You can remind clients to zoom out from any particular period and focus on the long-term trend. Assure them attaining their goals is worth riding out any turbulence.

Keep your focus on the longer term

Volatility and index prices for the S&P 500 Index, September 30, 1982, to December 31, 2018

Chart that overlays two metrics spanning from 1982 to 2018. One measure depicts the 30-day average intraday volatility for the S&P 500 Index; spikes of volatility are evident throughout the 36-year period. The other measure is of the overall level of the S&P 500 Index. Despite volatility, the index increased by nearly 19 times over the period shown.

Sources: Vanguard calculations, using data from Lipper, a Thomson Reuters Company.

Note: Intraday volatility is calculated as the daily range of trading prices [(high-low)/opening price] for the S&P 500 Index.

Volatility sometimes presents a great opportunity to rebalance. You can remind clients of the importance of asset allocation in achieving their long-term objectives. To the degree volatility makes it possible for you to advise clients to sell concentrated equity positions or high-cost active equity holdings with no tax penalty, clients can witness how you add value.

Be positive

Perhaps the most unsettling aspect of market downturns for clients is the perceived loss of control. That dread can be exacerbated by the constant drumbeat of dire news coverage of the financial markets and global and U.S. economies. You can reframe the situation by reminding clients of the means they do possess. They have the power to follow the actions that historically have resulted in success weathering market lows. They should:

Tune out the noise

It's OK for clients not to check their balances when the market is plummeting. Turning off the financial news might be smart if it prevents them from making mistakes motivated by rash actions.

Revisit their asset allocation

For clients at certain life stages, such as near or in retirement, or for those who lose sleep over downturns, you may need to reevaluate their risk tolerance.

Control what they can: Costs

Expenses eat returns, and their bite is particularly painful during market corrections.

Set realistic expectations

Vanguard anticipates higher investment risks and lower returns over the near and medium term. Advisors can work with clients to develop plans that still achieve the clients' goals, informed by this guidance.

Stay diversified

Downturns provide advisors the opportunity to remind clients how different asset-class and sector exposures can help to insulate their portfolios. Talking with clients about their risk tolerance also gives advisors an unparalleled window into clients’ thoughts on investing, deepening the relationship.

Take action

Our research has shown that demonstrating your understanding and empathy for client concerns—such as changes in their portfolios' balances in the midst of market disruptions—builds trust, deepens relationships, and increases the likelihood of referrals. By using the 3Ps of the Vanguard Advisor's Alpha® behavioral coaching framework—that is, proactively arranging conversations with clients, framing them in a positive manner, and building on a solid plan—you can guide your clients to better decisions no matter what the markets are doing.

Notes:

  • All investing is subject to risk, including the possible loss of the money you invest.
  • Diversification does not ensure a profit or protect against a loss.
  • Investments in bonds are subject to credit, interest rate, and inflation risk. High-yield bonds present higher credit risk than other types of bonds.
  • Be aware that fluctuations in the financial markets and other factors may cause declines in the value of your account. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income.