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When it comes to advising clients though a volatile market, we often find ourselves repeating that it’s “time, not timing” that makes an investor successful. Even so – every advisor has had the disheartening experience of watching a client get spooked out of the market or miss the mark trying to time a correction.
Next time you see a client’s resolve to stay invested waver, ask them two questions:
“What would you pay yourself for an hour of your time?” and, “Is it more, or less than $243.09?”
Imagine momentarily that it is 1994: the year that three investment advisors and the eventual co-founders of McLean & Partners began working together. At the same time, unbeknownst to you, your client has invested $1,000,000 in the S&P 500 and then promptly forgotten about it until this very morning. All this time there would have been no one to rebalance the portfolio; no one to pick the right winners; no one to anticipate the bubbles and bursts.
Indeed – without you there to guide it, the investment would have weathered:
- 2000: The Dot-Com Crash
- 2007: The Great Financial Crisis
- 2018: The US/China Trade War
- 2020: The Covid-19 Pandemic
And yet it would be worth roughly $11,700,000 today.
The portfolio would have paid your client $243.09 an hour for every hour that the stock market was open.
This is not to say that your services aren’t worthwhile. On the contrary – ask yourself why, even if every one of your clients were to see these numbers, some might still find it so difficult to stay consistently invested?
Despite periods of market expansion (positive growth) vastly outweighing periods of correction both in duration and magnitude, corrections are much faster and more painful.
Coupled with how relatively rarely they happen, this makes them feel strongly and significantly “worse” to clients than the many years of steady-as-she-goes expansion surrounding them.
The painful truth, of course, is that no one can consistently pick the “fast lane” and only get (or stay) invested when the going gets good. In order to benefit from the fastest periods of growth – which happen immediately after a painful and uncertain correction, not unlike the one we are experiencing right now – clients need to be invested through them, too.
Let’s not forget that our imaginary client from 1994 would have bled nearly $21,000 an hour during this year’s correction. Their reward for weathering those 153 hours of pain, however, would be 460 hours of approximately $7,000-per hour gains in the subsequent recovery, returning to their pre-COVID portfolio value and then some by mid-year.
The same story re-writes itself with every correction: The relatively short hours of loss are seared into clients’ psyche and often affect their emotions, investment decisions, and asset allocations for years if not decades. The relatively long periods of prosperity, however, do not make nearly as strong of an impression despite “gain hours” outnumbering “loss hours” by over 5:1.
This boils down to loss-aversion – a well-known and well-documented behavioral bias that affects us all. The tricky part about behavioral biases is that they are rooted in emotion, not logic, meaning that no amount of facts and figures can erase them entirely.
That said, the next time you advise a client who feels forced to “sell” or “bet on the fast lane,” reframe their thinking in terms of what an hour of their time is worth in their own portfolio’s growth.
You will help them discover that the best thing they can do for their portfolio is nothing.
Anna Premyslova holds the Chartered Financial Analyst designation and is a graduate of the Smith School of Business at Queen’s University. Prior to joining CWB McLean & Partners, Anna held roles in corporate finance within the oil & gas industry before steadily building her professional experience in private wealth management. Anna has a meticulous approach to portfolio management and prides herself on providing exceptional client service. Outside of work, she is also president of Calgary’s Queen’s alumni branch. Anna can be reached at 403.234.6114 or [email protected]
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Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.
