Look at the correction as an opportunity to engage with your clients, says Amit Trivedi of Karmayog-Knowledge.
There was a race between the Sensex and mercury in Mumbai. While the lowest temperature for the day dropped by 10 degrees over two days, the Sensex crashed by more than 500 points yesterday. This was one of the steepest falls in terms of points. Suddenly, investors and intermediaries are nervous.
So in this gloom of falling markets, why does my headline sound so cheerful?
No, this was not an attempt at gallows humour! It was deliberate. In the market, one always gets contrasting views. In fact, this is what keeps the markets functioning and healthy. It is up to us to decide whether to focus on the negatives or the positives. That is why the title of this article has a positive tone.
We think there is a huge opportunity for the advisors when the markets fall. This is the time to cement the relationship with the clients. This is the time when the client is about to make a costly mistake – that of deviating away from the plan that has been agreed upon. This is the time when someone is likely to book a permanent loss because of a temporary panic situation.
A good advisor is not supposed to be a good investment manager – and that is why so many choose mutual funds. The role of a good advisor is to be a good ‘investor’ manager. Understanding this distinction is critical for the success of the advisor-client relationship.
Such drops in market prices offer an excellent opportunity to an advisor to go to their clients and have a meaningful dialogue. This is when a client is looking for someone who can calm their nerves.
Let us recall the first test match between India and Australia in the current test series. India lost the match. However, captain Kohli won accolades not just for his excellent knock in both the innings, but also for the positive approach shown by him. He made his intentions clear that he was not just going to sit and be a passive observer. He was willing to stand up even at the risk of losing.
The current market crash is similar to the situation in that match on the last day after Murali Vijay got out. Kohli could have asked the batsmen to play for a draw. He chose not to even think of a draw.
An advisor may choose to go to the clients and face the music or to sit in the office and stay away from a difficult conversation with the client.
There is a clear risk in the first situation, whereas the second situation appears risk-free. One doesn’t have to face the music. However, the bigger risk in the second choice is that if an advisor does not talk to the client, someone else will. This someone else could be a friend, relative, TV anchor, newspaper reporter or your competition. And you have no control over what they tell your client.
Grab this opportunity with both hands.
So, what do you tell your clients?
First of all, tell them that in a market where buyers and sellers meet regularly and transact, prices do fluctuate. There are conflicting views from various experts. Is it normal? Yes, on each such occasion, the experts would be divided. There is absolutely nothing wrong in that. What happens in such times – when the prices are stretched in one direction and more so when the direction is downwards – is that media wants to highlight the reasons behind the fall and get the experts’ opinions about the future direction of prices. Such amplification of the noise is what disturbs most of us – we are not wired to understand and appreciate non-linear (volatile) movements. But you must ignore it, as this is just noise.
Next, remind them of the age-old question and the one that matters most in the world of investing, “Why?”
Why did they invest in the first place? Remind them of the reasons why equity was added to their portfolio. Is there any change in any of those reasons?
Let us look at three typical situations in which you recommended equity mutual funds to your client.
- Situation 1: You recommended that your client should keep investing a small amount regularly in equity mutual funds through SIP in order to accumulate funds for a goal in future. Well, a fall in the prices does not warrant any change in this strategy, as long as the goal is still there. Should the client buy more at such prices? Not required, since SIP will take care of the fluctuations and on the next date, transactions will happen at the new price.
- Situation 2: You recommended a small allocation to equities in a predominantly debt portfolio. Once again, ask yourself, “Is there a change in that situation?” If no, there is no reason to discontinue the investment.
- Situation 3: You were simply speculating on equity prices to rise forever (for whatever reason). In that case, God help your clients. Remember, many had similar views when the technology stocks were scaling new highs in 1999-2000 or when the mid-caps were rising through the roof in 2004 or when the infrastructure stocks had a sustained bull run in 2007. In all these cases, a speculation on the prices proved to be wrong when the inevitable happened. Remember what Sir John Templeton said, “The four most dangerous words in the world of investing are, ‘this time is different.’” If you are speculating on prices of any asset, you better make sure you are the smartest speculator and that you are able to get out before the music stops. If you cannot do that consistently, then speculation is not for you.
So here is a request to all - meet your clients when they need you the most. Right now.
Amit can be reached at amit@karmayog-knowledge.com
The views expressed in this article are solely of the author and do not necessarily reflect the views of Cafemutual.