One of the highest values a financial advisor can offer to clients during turbulent and emotional times is perspective. While a client may see only the value of their portfolio in a given moment, you have the experience and expertise necessary to help them see the larger picture.
And if you can avoid cliches (like the oft-mentioned “stay the course”) and instead reference hard data to help reassure the people you serve, all the better.
Thankfully, you have access to that kind of hard data in Kwanti to support your conversations.
Here’s how you can discuss long-term investing, diversification, and realistic expectations with your clients to keep them confident and give them peace of mind, even when the markets aren’t trending up.
Take a Long Term View of the Markets
Caution your clients to avoid looking at a short time period, and instead zoom out to have them focus on their entire invested lifetime.
In the graphic below, you can see a five years snapshot of equities, as represented by the S&P 500 Total Return index. Over this time period, equities had a 5.02% annualized return, even including the recent market drop (as of 3/19/2020).
This number is consistent with generally accepted long-term expectations for equity returns.
Demonstrate How Diversification Works
Every financial advisor knows a balanced portfolio of stocks and bond is less exposed to unexpected crisis, but sometimes your clients need to be reminded of that as well.
The image below shows the recent stability of the US bond index (orange line) in contrast to the S&P 500 (shown in green).
By creating the traditional balanced portfolio of 60% stocks and 40% bonds, you can clearly show clients how their portfolio may be experiencing fewer losses than a portfolio invested 100% in equities (blue line).
In volatile markets, providing this comparative perspective to your clients can be critical to giving them confidence in the portfolio they’ve chosen.
Set Realistic Expectations
Showing clients that their portfolio hasn’t lost as much as it could have can provide some relief, but it also doesn’t completely dull the pain of a volatile market.
It’s important to be transparent about market uncertainty, even as you do what you can do calm client nerves during times of losses.
Based on all we know today, the global health and economic crisis is not over, and recovery will likely be slow. You need to also set reasonable expectations for what clients can anticipate in terms of recovery time.
In the 2008 financial crisis, we can define recovery as measured by the time necessary to reattain the pre-crisis valuations. In that scenario, the S&P 500 took three years to get back to those valuations.
That recovery was long, and required patience, but it also was a crucial time to invest in equities to participate in that recovery.
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