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Be careful to balance boosting clients’ confidence against realistic expectations.
Your most valuable role during market turmoil is providing clients the confidence they need to stick with a strategy in the midst of fear.
Keeping them invested appropriately when it is hard and counterintuitive may be some of the most valuable advice you offer. Confidence is a powerful tool and associated with it is a trap. Optimism kills.
In researching his book Good to Great, Jim Collins interviewed Adm. Jim Stockdale, the highest-ranking prisoner of war in Hanoi during the Vietnam War. During their discussion, they touched on the topic of state of mind.
Who didn’t make it out?
Oh, that’s easy, he said. “The optimists.”
"The optimists? I don't understand," I said, now completely confused, given what he'd said a hundred meters earlier.
"The optimists. Oh, they were the ones who said, 'We're going to be out by Christmas.' And Christmas would come, and Christmas would go. Then they'd say, 'We're going to be out by Easter.' And Easter would come, and Easter would go. And then Thanksgiving, and then it would be Christmas again. And they died of a broken heart."
Another long pause, and more walking. Then he turned to me and said, “This is a very important lesson. You must never confuse faith that you will prevail in the end—which you can never afford to lose—with the discipline to confront the most brutal facts of your current reality, whatever they might be.”
Collins called it the Stockdale paradox. It blends the importance of maintaining a positive attitude with the recognition that setting specific expectations can backfire.
How does this apply to advising clients? It can be hidden within the encouragement you provide.
I believe you need to do more than reflexively telling clients to “stay the course.”
You can talk to them about the long term, but a truly frightened client, one who suffers “under confidence” cannot think clearly in those terms. As Peter Atwater discussed in our interview a few weeks ago, those clients are focused on the “me, here, now” and talk of long-term plans may escape them.
They need more. They want to know you have a plan whether the market goes up or down.
But talking with clients about a “V” recovery versus a “U” one, pointing them to the length of past downturns and the speed of past recoveries, making predictions of when markets may recover certain levels is equivalent to saying “we’re going to be out by Christmas.”
I’m keeping my fingers crossed for a speedy recovery. I hear credible people talking about the possibility it may happen. Maybe you do too. Keep in mind you have a level of knowledge your most vulnerable clients don’t possess. Talking about those possibilities sets an expectation that may disappoint them. Disappoint them a few times, and they may give up. The optimists didn’t make it out.
From my experience as a paramedic, I learned you can offer people some relief by giving them something to do. Family members who knew and performed CPR on a relative who died struggled less with grief than ones who were not trained and could only wait for help.
Collins has an image of Stockdale counseling the optimists “we’re not getting out by Christmas; deal with it!” The market is down, the portfolio has farther to grow or can produce less income. What can you work on with clients to help them “deal with it”?
It may be more constructive to go back to the plans and ask what you can do so that the plan still works. Can you put off some big expenses? Can you consider the possibility of retiring a year or two later?
Or maybe there are other things you can do to take advantage of the change in prices. Harvest some tax losses. Identify the buying opportunities you are keeping an eye on.
Mostly, you can empathize with clients. Share your own concerns. Validate their feelings of anxiety. Share your belief that things will work out, even though you don’t know when.
Related: How to Make Sure You Are Effectively Reassuring Clients