Trending
It didn’t take long, nor did it take much, for media sentiment and headlines to turn negative. And we know media headlines and how they frame their stories impacts what investors think and feel about the markets (and their own portfolio).
How Did We Get This Change?
The Fed, not surprisingly, punted on cutting rates. While this may be frustrating, the Fed (especially Powell) is nothing if not late to the game. The Fed was late on raising rates and now they have guaranteed they will be late on cutting rates. The “R” word is back in vogue. The reality is that not cutting 25 bps is pretty immaterial to the economy but makes for good headlines.
We got a “disappointing” jobs report, coupled with the recognition that the Fed is behind the ball, the VIX skyrocketed, and markets moved quickly…as did the financial media. Sentiment is more negative today than just a few weeks ago.
Who Cares?
Let’s say the Fed and/or some macroeconomic forces push us into a recession. Let’s say hiring slows, layoffs increase, and it became clear that we were going to face economic headwinds for an extended period. How would you expect the markets to respond?
Since markets are made up of the decisions of many investors, and investors (even long-term investors) are heavily influenced by short-term outcomes, we can reasonably assume the market would sell off. Perhaps a bear market would ensue.
What if Investors Acted Long Term?
Most investors have long-term time horizons (greater than 10 years). Even those already retired, drawing income from their portfolio, want their portfolio to last more than 10 years. But the problem is that many investors act as if they were short-term investors. Assuming income/cash needs are prudently planned for, even those drawing income shouldn’t be too swayed by economic cycles.
What would be the outcome if investors actually acted as if their time horizon was 10 or more years? Think about it. Would selloffs even happen? Probably. Would bear markets become extinct? Perhaps. Selloffs would still occur thanks to speculators, hedge funds, and automatic trading. But they would likely be short lived as long-term investors took advantage of irrational dips to add to their positions.
It’s Not About the Markets
Such thought experiment can remind us that our clients’ success isn’t so much about what the market does (especially in the short run), it’s about how clients respond to market movements, headlines, and spurious predictions.
One of the greatest values advisors can offer investors today is sharing proactive, thoughtful perspectives that helps investors ignore the noise and focus on what really matters.
Final Comment – Call to Action
Did you do anything this week to proactively alleviate client concerns? Members of the Behavioral Finance Network got content last week they sent to clients helping them mentally prepare for a turndown. This was followed by a coaching message from me Monday morning along with a compliance approved email to send to clients – helping investors put in perspective what was happening at the moment.
Waiting until a client calls or emails with concerns is too late. This isn’t only about helping clients make wise decisions, it is about improving the investor experience. Including how they may be feeling and what they are thinking during turbulent times.
Related: A Financial Plan Is Not Enough