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Obviously, the stock market’s volatile and you’re going to encounter volatility your entire career. It’s the normal part of the market. Even though volatility is normal, it makes clients very nervous. Fear is a bigger emotion than greed.
One of the challenges for you in volatile markets is that clients can slip into a behavior called anchoring. When clients give you a specific amount of money, that becomes the anchor amount of their portfolio. They refer back to that initial amount when evaluating any ups and down in value. Let’s say hypothetically that a $100,000 portfolio falls in value to $90.000. Right away, they think to themselves, “Oh, it’s broken.” Something’s wrong.”
If you think about it, if somebody would walk into Best Buy and look at a laptop which is a thousand dollars and say, “It’s too much.” – the next time they visit and it’s marked down to $900, they’re going to buy it. They don’t think it’s broken. They think it’s on sale. That’s called retail price anchoring. Most retailers do it. They set a high price that people see and then they mark it down, enticing consumers to buy it. In our business the effect is the opposite. When they look at their current value and say, “My portfolio’s broken”, it’s not. The investments inside the portfolio are on sale.
When the market drops, you intuitively think that it’s time to begin buying selectively and your clients might be thinking that it’s time to be selling. Investing is counter-intuitive and that’s what makes it so difficult to invest successfully. The next time the market experiences a loss, ask your clients this question, “Mr. and Mrs. Client, can you take my advice even though you disagree?” “But why are you asking me that?” “Mr. and Mrs. Client, can you picture those Acapulco cliff divers?” That’s a great word picture. Everyone knows what those people look like.
I’m sure you’ve seen pictures of those guys. They are diving from a cliff 115 feet in the air into a pool of water called The Gulch. Depending on the waves the “Gulch” can vary from 6 to 16 feet, with an average depth of 12 feet. That’s an incredibly dangerous jump, because so much depends on the timing of the divers. They have to catch the right wave.
Let’s assume there are two divers on top of the cliff, one experienced diver and one rookie. As they look down, they see the water coming in and out. When do you think the new diver would jump, when the water was in or when the water was out?
We both know that he would jump when the water was in. But what would happen by the time he got down there? Absolutely! The water would be gone.
The veteran diver, on the other hand, would wait until the water was all the way out. Then he would jump. By knowing when to jump, he would catch the right wave.
Investing wisely is like cliff diving in Acapulco. It takes a true veteran to do it successfully.
Mr. and Mrs. Client, I am like a veteran Acapulco cliff diver. When I invest, I have to time my jumps. There will be times when I say hold my hand. We are going to jump. And the waves won’t look right to you. Where I see opportunity, you might see inflation or terrorism or an economy in trouble. That’s the counterintuitive side of investing.
When I recommend that you act, you will have to trust me that what I am recommending is right for you.
People remember stories much more than they remember facts.
Another volatility analogy I like involves cans of tuna fish. This is an analogy that is never misunderstood; has withstood the test of time and is perfect for the occasion.
Mr. and Mrs. Client, a can of tuna fish is currently priced about $1.50 per can. If you went grocery shopping on Saturday morning and saw tuna fish marked down to $1.25 per can, what would you do? Of course, you’d buy five cans of tuna fish. That’s the way you shop, that’s the way I shop and that’s the way everybody shops. We shop for bargains. Do you realize that, as a Financial Advisor, I’m in the only business in the world, when we slash our prices people run away? We mark our prices up to all-time highs and people throw money at us.
We are going to invest your money just the way you buy tuna fish. We are going to find bargains and we are going to act. I want you to start thinking of down markets as bargains.
"And that’s what you’re striving for, of course, is that a-ha moment."
A third analogy I like is to say, “Mr. and Mrs. Client, when you invest your money and you got money in the market, you’re really going to focus on the market because until you have your money invested, you don’t know that emotional rollercoaster ride. Once you’re in, you’re watching every single day and you’re going to hear words on TV and read words in the paper that scare you to death. I want to remind you, they’re just words. Words are words. The idea is they’re going to sell space and time, so their use is to scare people to death. Market soars a thousand points, market plunges 900 points. Those are just words. How would you feel tomorrow morning, Mr. and Mrs. Client, if you got an elevator, it didn’t say up or down and said soar or plunge, what would you do? Those are just words. So don’t worry about the words. Focus on the destination, not the journey.”
I hope those analogies help just calm people’s fears down in times of volatility. Volatility is a very normal part of the market.
Related: Transforming Negative Perceptions as a Financial Advisor