Global risk assets finally stumbled in the first half of 2022 after three consecutive calendar years of above average performance. This — along with tightening monetary policy, the Russia-Ukraine conflict, rapidly rising interest rates, and surging inflation — has roiled markets and rattled investor sentiment.
In volatile times like these, providing advice goes beyond asset allocation and retirement projections to include managing client behavior. In other words, helping them understand the potential risk of trying to time the market and stay focused on their long-term financial goals.
Market downturns are always unsettling, but reflecting on the market volatility in 2020 may help keep things in perspective today. When the S&P 500 Index experienced a sharp downturn on March 16, 2020, stocks dropped nearly 12% in a single day — one of the worst one-day returns in history. The uncertainty of a global pandemic and the risk of a prolonged lockdown made it easy to get caught up in the fear of a major correction. But investors who sold stocks in March missed the market rebound; the S&P 500 ended the year with an annualized total return of 77.58%.1
Trying to time the market usually comes at a cost. This is a critical message to convey to clients vulnerable to selling the dip — it’s simply impossible to know when exactly the market will hit bottom or when to jump back in.
Two client types in particular may be vulnerable to making poor investment decisions when volatility strikes: new investors and those nearing retirement.
Younger investors or those who started investing after the 2008 Global Financial Crisis have only ever experienced a bull market.
A bear market or recession may cause them significant distress, even panic. How can advisors help?
Whether your clients see the current market downturn as an opportunity to buy and hold, or they fall victim to chasing returns, will likely depend on your ability to steer them away from benchmark performance-focused discussions and toward decision-making that supports their long-term goals.
More mature investors, on the other hand, may be concerned about the timing of a downturn, or their sequence of returns risk. After all, clients nearing retirement or already retired have few or no income-earning years left to make up for large drawdowns. So when market losses are mounting, how can you help mature investors avoid panic selling? How can you help calm their fears?
It goes back to helping clients mindfully link risk to their goals, time horizon, and life stage, to take advantage of the value that portfolio construction delivers. Instead of trying to time the markets, consider creating an equity glide path that gradually reduces market risk as clients approach retirement or during their retirement years.
Having a plan in place that is designed to achieve their financial goals — regardless of unexpected market volatility — can help clients feel more confident that they’ll have the money they need to enjoy their retirement when they need it.
Because irrational behavior is an all-too-human trait, even among the smartest investors, it can be especially difficult to stay the course during a crisis or times of market volatility. That’s why an advisor’s role in emotional governance is critical to clients’ long-term success. And it’s why market volatility presents an opportunity for advisors to strengthen client relationships.
For all types of investors, the key is to balance investment risk with opportunity risk in a way that reflects a client’s unique risk tolerance. Simply put, volatility is not the only risk to consider. It’s equally important to help clients make investment choices in context with their life situation. What is their investment horizon? What stage of life are they in? What are their financial goals?
During stressed markets, you can help reorient clients to the long-term outcomes they sought to achieve in the first place. And review how well-positioned they are to reach those goals. The best time, however, to start educating clients about potential risks and how you can help is early in the relationship and before market volatility strikes.
To help you engage in conversations that reinforce your value as an advisor — ones that help clients put risks in context, identify goals, and reveal biases that may make them vulnerable to poor investment decisions — check out the goals-based planning conversation guide below:
Volatility and market downturns may be inevitable, but they shouldn’t undermine an investor’s ability to meet their long term financial goals.
All the rational financial discussions in the world won’t propel an investor to their goals if they are not aware of their tendency to make decisions emotionally. That’s where you as the advisor can add value and, in the process, strengthen relationships with your clients.
More specifically, you can help them:
For more on what you can do amid current market volatility, read over our list of 4 Things Investors Can Do in Volatile Markets.
1 Bloomberg Finance L.P., based on daily returns since 1950 for the S&P 500 Index. Calculations by SPDR Americas Research. Index returns are unmanaged and do not reflect the deduction of any fees or expenses. Index returns reflect all items of income, gain and loss and the reinvestment of dividends and other income as applicable. Past performance is not a reliable indicator of future performance.
The tendency of a market index or security to jump around in price. Volatility is typically expressed as the annualized standard deviation of returns. In modern portfolio theory, securities with higher volatility are generally seen as riskier due to higher potential losses.
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The views expressed in this material are the views of the State Street Global Advisors Practice Management Group through the period ended February 28th, 2020 and are subject to change based on market and other conditions. The opinions expressed may differ from those with different investment philosophies. The information provided does not constitute investment advice and it should not be relied on as such. It does not take into account any investor's particular investment objectives, strategies, tax status or investment horizon.
This document contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.