Rebuild Market Confidence
February 17, 2009
4. Talk about today’s opportunities
The next step is to discuss the opportunities in today’s market.
There are two ways to do this. One is to have a macro, top down conversation, discussing market valuations and price earnings multiples. This can work in some cases, but it will not be persuasive in others. In some cases, clients won’t understand; in others, they will have heard the same lines in the past. And having a rational conversation about valuations may not address the real issue for many clients — their fear and emotional response to last year’s events.
A better approach might be to focus on individual stocks that clients are familiar with. Consider companies like Microsoft, McDonalds, Walmart, Procter & Gamble, Johnson & Johnson, Pepsi and Coke. These are all household names for which you can make a compelling mid-term case, either as an individual stock or as a top holding in a mutual fund you recommend, in spite of immediate uncertainty. And all pay solid dividends with good coverage levels.
In today’s environment, a bottom-up, company-specific conversation will often engage and reassure clients in a way that top-down, valuation-focused conversations won’t.
Another key point in a discussion about investing opportunities relates to focusing on the right timeframe. A conversation about what markets are going to do this year risks getting bogged down. Providing that it’s a fit with a client’s time horizon and risk tolerance, it’s much easier to build a compelling case for stocks out three or five years.
5. Discuss the best way to reenter the market
It’s always important to talk about the possibility of markets declining in the short term, but it is especially crucial today.
If clients have bought your argument so far, you still need to make clear how impossible it is to predict short-term market fluctuations. You can point to data showing how markets have bounced back after huge declines like we saw last year, but you also need to acknowledge the possibility of continued tough times in the period immediately ahead.
Given those uncertainties, it’s important to talk about how to enter the markets. In some cases, clients will be prepared to commit fully now, but in others they may want to wait until there are clear signs of a market recovery. They may be willing to give up a gain of 20% or more to do that. (The other problem with waiting for a run-up to reenter the market is that markets never move up in a straight line, meaning a 20% gain can be immediately followed by a 10% pullback.)
For many clients, the best solution might be a staged approach, investing in phases over a period of 12 or 18 months.
This conversation won’t always be –easy, and in some cases rebuilding long-term confidence in markets will be a tough task, requiring repeated discussions.
But the fact that a conversation is difficult doesn’t mean it shouldn’t take place. In many cases, this is the most important message that Americans need to hear from their advisors today, and it is one way that advisors will prove their worth and deliver real value to clients going forward.
* Dan Richards conducts programs to help advisors gain and retain clients and is an award winning faculty member in the MBA program at the University of Toronto. To see more of his written and video commentaries and to reach him, go to www.strategicimperatives.ca.
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