Unpleasant market news strokes fear in investors’ minds. Though veteran investors do not panic at every correction, the same cannot be said for the new entrants in market. In such a scenario what should you do? How can you soothe your clients’ nerves and prevent them from taking hasty decisions.
Here are five tough conversations that you should have with your clients when markets take a turn for worse.
Take the initiative – do not wait for client’s call
As advisors, you may see the short-term corrections in markets as a chance to accumulate wealth. However, clients may not share the same enthusiasm. As their portfolio value slides, their worries shoot up.
Proactive communication sends the message that you are carefully tracking the market and will guide them in rough times. Naturally, it may take some time for you to connect with your large client base individually. In such a scenario, you can shoot a quick email or share an article, which talks about how investors can benefit from the short-term corrections.
However, this is just a preliminary step. You need to connect with at least the new investors and educate them on the risks and market ups and downs. Changing client mind-set is a slow process. You need to keep sending the right investment message. As they start to see the merit in your advice, their market related fears would subside.
Help them understand corrections are common but crashes are few
Far too often investors board the bus in rising markets. The bull market euphoria makes them forget that market is a volatile beast. You need to explain to your clients that even a bull market has multiple small corrections along the way; you can drive the point home by sharing the historical Sensex chart. Make them understand that a 100 points decline in market is not a crash. The market dips and bounces back multiple times in both a bear and bull phase. Encourage investors to appreciate these short downturns. Help your clients see these downturns as bus stops. It is difficult to board a moving bus. Thus, the bus stops periodically to allow new passengers to get in and old passengers to get out. Similarly, tell them that these corrections are opportunities to board the market bus and not alight. Alighting mid-way will prevent them from reaching l their destination (financial goal) in time.
Give a realistic estimate of what they can lose
Often the fear of unknown is stronger than the fear of known risks. Giving clients a likely estimate of maximum wealth erosion in case of a market crash helps prepare them for the inevitable. You can use historical market data to calculate rolling returns. Through rolling returns calculation you can arrive at the average returns, standard deviation in returns and the minimum and maximum returns delivered by a fund for a particular holding period. This will help your clients gauge the fund’ performance in different markets. When an investor is aware of the probable range in which his portfolio may fluctuate, he is less likely to panic at every small correction. He is also more prepared to stick to his investment plan.
Share historical market data
A quick look at historical data reveals that the market has been through multiple bull and bear cycles. However, what is clearly visible is that on a net basis market has moved upwards. Counsel clients to see this in conjunction with their financial goals. Over a 10 to 20 year horizon, the probability of negative returns is miniscule. It is more likely that the investor will generate significant wealth and beat inflation.
Stick to the investment plan
Encourage them to stick to the investment plan. Typically, you may have divided their investments in different assets based on the investor’s goals and risk profile. Stopping or channelizing savings in to a different asset mid-way puts the entire financial plan in jeopardy.
Help them understand that no one can time the market accurately. It is better to stick to the plan. In case you feel that there is a need to rebalance the portfolio you will guide them accordingly.
Help them understand that by panic selling during interim bull market corrections they may in fact, end up buying high and selling low instead of buying low and selling high which will be detrimental for their finances.
In addition, you need to ensure that you never recommend aggressive investments for short-term goals and account for your client’s liquidity requirements before recommending a plan.