January 27, 2020 | Vanguard Perspective
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.
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.
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.
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.
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.
Volatility and index prices for the S&P 500 Index, September 30, 1982, to December 31, 2018
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.
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:
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.
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.
Expenses eat returns, and their bite is particularly painful during market corrections.
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.
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.
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.