‘7-point plan for staying patient’: Stick to the plan… your discipline and patience WILL be tested

Following on from Diversify… but do it intelligently let’s now look at how market volatility can really test an investors’ discipline.

Successful investors understand the importance of sticking to the plan. Those who have built a robust investment strategy, with appropriate diversification, and successfully navigated many market gyrations along the way, keep the ‘plan’ front of mind in the midst of market volatility and emotional ups and downs.

There is nothing like a volatile market environment to test the discipline and patience of an investor. But never forget, as an adviser, your clients are looking to you to provide the experienced hand to help them sail through market squalls and storms. Question is though, how confident are YOU when things get turbulent?

Source: Russell Investments, Financial Professional Outlook (April 2016)

The chart above shows the results of a quarterly survey conducted of US financial advisers. It asks “How optimistic or pessimistic are you and your clients (investors) about markets over the next 3 years?”

The most recent survey, reflecting the worst of the market volatility since the middle of 2015, shows the gap between the ‘average confidence’ of advisers (blue) and their clients (orange) increasing as markets have been getting more volatile. In other words, when markets get volatile, clients get jumpy far more quickly than advisers do. In fact, this pattern is repeated in previous periods of heightened volatility going back over the five years since the survey started. This provides advisers with much food for thought when it comes to helping your clients ‘stick to the plan’ in a volatile environment.

Firstly, if you are not confident in the investment plan you’ve put your clients into, then you simply can’t expect your client to exercise discipline and stay the course when things get rough. This is like the blue area in the chart moving to the left (i.e. less confident) just as much as the clients orange area is. This is a recipe for investment disaster, unintended outcomes… and ultimately wealth destruction.

Secondly, even if YOU are confident, it still follows that your clients are most likely (on average) more nervous than you are when volatility hits. So the question here is “how are you engaging and conditioning your clients about what to expect from their investment strategy in different types of market conditions (up, down, volatile)?” Forewarned is forearmed... and helps build client confidence to stay the course.

At the heart of all this, the manner in which your client’s strategic investment plan is constructed is critically important. It needs to be aligned to achieving client long term objectives, consistent with their preferences and risk tolerance, grounded in reality and robust through varying market cycles. If it’s not, you need to make it a priority to revisit it and ensure it meets these criteria. Once this is in place, your client confidence will rise knowing they’re invested according to a robust process that has successfully navigated challenges before… and will do so again. Get the foundation right first, then stick to it.

This article forms part of the 7-point plan for staying patient series.