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Written by: Daniel M. Yerger | MY Wealth Planners
It is commonly held wisdom among financial professionals that timing the market is generally a foolish activity. Study after study has shown that attempting to time the market, whether in timing when to get in or when to get out of the market, fails to outperform a lump sum “buy and hold” strategy implemented at the outset of the market timing attempt. Yet, all year, financial planners have listened patiently to clients who have asked whether they should get out of the market during the downturn or otherwise whether they should invest in something different. It’s no surprise that clients have been skittish and tempted by the allure of simply not losing more money when it seems like the market has gone down and down for the past ten months. The inverse has also been true. It is well observed by many that plenty of investors are sitting on the sidelines, “waiting for things to get better.” Yet, as the research would show, there has never been as good a time as today for someone to get their money to work for them, whether today is the most optimal day among all the other days or not. So, what can financial planners do to help clients stay the course who are already in the market and encourage clients out of the market to get back in?
Helping Clients Stay In
There’s an old expression: “The plan never survives contact with the enemy.” While this is normally applied in consideration of military operations, the same truism holds to financial planning. Yet, rolling off of a decade of stellar returns, often exceeding ten percent per year in the equity markets, clients are surprised to see that the “on average” return financial planners often present does mean that there will be down years. Yet, the guidance financial planners often provide to their clients is that investing is a long-term activity. Clients have been thrilled to sit in their holdings for the past several years, soaking in double-digit returns in many cases. However, after less than a year, they find themselves questioning their decisions. A few forms of framing can help advisors calm their nerves. For example, rewinding: “Today, the US market is at about the point that they were in late November of 2020, having just rallied enormously after a substantial and even greater decline than we’ve seen in 2022, in the spring of 2020. Were we elated in November 2020? Certainly. So why be so scared now to simply have taken a small step backward after such an incredible run of market fortune?” Or bringing the focus to the value of rebalancing: “Rebalancing normally helps us adjust and keep our portfolios risk levels at the level we want them to be on a going basis. Frankly, rebalancing can seem like a bit of a drag when the market is climbing. ‘Why sell the winners to buy the losers?’ you might ask. Yet, rebalancing really shines in a down market when we’re able to sell those conservative holdings that were dragging during the good times to buy more of the aggressive holdings we were so excited about before.”
Helping Clients Get In
Of course, the tougher thing can be getting clients to invest when the market is down. Similarly to keeping people in their seats, there are plenty of good frames of mind to which one can draw a client’s attention. For example, the inflation loss guarantee: “If we keep your investments in cash today, we can assure you that you will probably still have the same amount of cash in the future, maybe even with a little bit of interest on top. Yet, we can also assure you that if inflation keeps up the way it has been, you’re just about guaranteed to lose several percentage points of purchasing power each year that we do this. So the question for you, [Mr., Ms., Mrs.] Client, is this: Would you like to guarantee that your money will lose value over the long term by staying in cash? Or would you like to take the good bet that your money can grow in value over the long term by buying into the market today at a discount?” This naturally leads to another good framing, that of the discount itself. “Imagine you were at a car dealership. Would you be excited if the salesperson came and told you the price of the car you want has just gone up by ten percent? Or would you be happier if they told you it was down ten percent? Of course, you’d rather pay less for the same thing. If that’s the case, then let’s think about your investments. Do you want to buy investments now while they’re on sale by five, ten, fifteen, or even twenty percent? Or do you want to wait until the sale is over?”
Staying the Course Yourself
Of course, there’s the final element in all of this: You! As a financial planner, you’re just as human as your clients. So how do you steel your own nerves? Simple: You’re a student of history. As Sir Templeton famously said: “The most dangerous words in investing are ‘this time it’s different.’” You have to keep that in mind for yourself, not only as you manage your own money but also for the client’s money you may have been entrusted with. Given that mandate, you have to follow your own rules: Don’t yield to the temptation to time the market or pretend the tea leaves of technical analysis hold any merit. You know that by continuing to stay invested, you can ensure that not only your own financial outcomes are likely to be better, but more importantly, that your client’s outcomes will be too.
Related: “Risk” From a Client Perspective