Rebuild Market Confidence
February 17, 2009
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The events of 2008 damaged investors’ psyches in two important respects. Many investors lost confidence and trust in their advisors and financial institutions. Moreover, those investors grew skeptical of the long term merits of investing in the stock market.
The top priority for advisors is to rebuild confidence and trust, both in them and in the markets.
After the tech wreck earlier this decade, many Americans took a skeptical view towards high tech stocks, especially start-ups.
Today, investors are looking skeptically at all stocks.
This is understandable to an extent, given last year’s dramatic sell-off, the continued unraveling of financial institutions and ongoing market turmoil.
But shying away from investing in equities will make it impossible for many investors to achieve their long-term goals. The primary job for many advisors today is to help their clients understand that.
Here are five elements of a conversation you may want to have with clients to help rebuild confidence:
1. Start by addressing soft issues
Having a productive conversation about markets often means starting with a client’s emotional response to the decline in their portfolio. Until you deal with a client’s “soft issues,” they will likely avoid the hard issues — their plan and the make-up of their portfolio.
“Many people lost sleep as a result of the markets last fall,” you might begin. “How did you find last fall’s market affecting you?” Sit back and patiently hear the client out — the time you spend on this first stage is essential. Clients need to feel that you’re listening.
And don’t forget to let clients know that you understand how tough they found this — clients also want to feel that their advisor empathizes with their situation.
2. Go back to client objectives
The next step is to revisit the client’s objectives and their plan for achieving them.
If your client can still hit their long-term goals with a return of 4% or 5% per year, then staying away from stocks can be a rational response.
But the hard reality is that most clients will need a significantly better return than that to achieve their retirement objectives.
It may be worth explaining the specific implications of lower returns: the need to save more, work longer or accept a lower standard of living in retirement — in some cases, all of the above. The essence of financial planning is understanding tradeoffs, and there’s no better time than right now to talk with clients about the tradeoffs involved in rejecting equities.
3. Point out the extent to which last year was an aberration
Last year’s decline was one of the most extreme on record; you have to go back to the thirties to find an equivalent drop in the markets. You might want to start by walking clients through a commonly available chart that shows the distribution of long-term returns. [Ed. Note: See here for example.]
Going back to 1925, these charts show that stocks return an average of 10% and make money in 70% of all years.
In some instances, be prepared to get a skeptical response — some particularly cynical clients cast a jaundiced eye on these charts, seeing them as a “sales pitch” on the part of their advisor. Try to avoid charts that have the logo of a money manager or fund company — these can be red flags for some clients.Display article as PDF for printing.
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