Investors are faced with headlines every day that inevitably lead to uncomfortable conversations about the importance of not bailing on investments when markets get jittery . Headlines inevitably distract investors.
On days where your screen is flashing red and clients are calling in a panic, wondering if it’s time to pull the plug, it’s more crucial than ever to remind them of the bigger picture longer-term. At Russell Investments, we believe that your greatest value as an advisor is to act as a behavioral coach, effectively helping avoid missteps that can lead to bigger shortfalls than investors may already be facing. Recent events have served as a reminder of this. Investing can be uncomfortable for a lot of people, but does it have to be?
To help ease some of the potential angst, here are four general rules to help keep your clients calm and invested.
No one (really) can time the markets
“In the financial markets, hindsight is forever 20/20, but foresight is legally blind. And thus, for most investors, market timing is a practical and emotional impossibility.” - Benjamin Graham, The Intelligent Investor
Even the most sophisticated of investors will tell you that it is virtually impossible to accurately predict the market’s short-term moves. In fact, mistiming can be disastrous to investment returns. In a low growth/lower return environment, what does this mean for your most vulnerable clients? In today’s reality, where investors are more likely than ever to face retirement income gaps, they can’t afford to miss out on returns.
Remind clients about the power of being invested over the long-term. Not being invested (strategy #5 in the chart below), and simply leaving money in cash, yields by far the worst ending wealth of any investment option. Even investing your money on the worst days of the market (strategy #4) is still more favorable than not investing at all.
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Nothing, especially volatility, lasts forever
There have been many times throughout history where markets have pulled back—but these relatively short periods are most often followed by the most favorable returns. Unfortunately, due to loss aversion—one of the principles of behavioral economics—people tend to remember the bad twice as much as the good1. This means that despite having experienced the longest bull run in history, a few bad days in the markets can cause investors to rethink their long-term investment strategy.
Since 1924, Canadian stocks have more often finished the calendar year in positive rather than in negative territory—in fact, 73 percent of the time, as evidenced in the chart below. It’s extremely challenging to predict whether a calendar year return will be positive or negative.
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Source: Represented by the S&P/TSX Composite Index from 1924-2019.
Index returns represent past performance, are not a guarantee of future performance, and are not indicative of any specific investment. Indexes are unmanaged and cannot be invested in directly.
Consider buying on the dip! Volatility creates opportunity
That luxury sports vehicle you have been saving for and eyeing for months is now 10% off. If you don’t buy it, you run the risk of never seeing that price again. Investing for your clients should be no different. While economic uncertainty will always be a cause for investor anxiety, the resulting market volatility offers the potential to better position portfolios for the longer term.
Markets sometimes become over-exuberant—and prices become excessive, but the opposite is also true. Short-term periods of crisis can push prices artificially low. Buy low, sell high is an idea that seems simple enough, but why don’t more investors do it? Blame it on the herding mentality.
“The only investors who shouldn’t diversify are those who are right 100% of the time.” – John Templeton.2
Having a robust strategic asset allocation with regular rebalancing can potentially enhance returns, but more importantly, manage volatility. Periods of panic provide an equally good opportunity to check in with clients and ensure that they have the right attitude when it comes to risk.
We believe it’s good to remind clients that asset classes change leadership regularly. Russell Investments has consistently advocated for investors to consider a global multi-asset approach to investing. We believe doing so puts clients on a smoother path toward meeting their goals. Put simply, investors diversify because the future is uncertain, and no one can predict with certainty which asset class will win or lose over the upcoming cycles. If part of your investment strategy involves chasing previous asset class winners, it’s time to stop.
The bottom line
Encouraging clients to take a step back and look at the bigger picture is important. Following the 2008 global financial crisis, we believe the most successful advisors were those who focused on deepening client relationships, not those who focused on maximizing investment returns. Be the behavioral coach your clients desperately need when times are hard or uncertain. They will thank you for it.