may be. Some of these solutions may be to spend less, downsize the home, earn more, or delay retirement. None of these solutions are good news, but it is better that your clients find out about their core issue sooner than later.
The other side of that equation is your dream client. This client needs to earn very little because of superior savings or very low costs of living, and has the tolerance and ability to withstand market cycles where losses dominate. In this case, your advice could range from very conservative up to investing according to your client’s higher tolerance for risk.
In each client review, I think it’s good practice to bring the humility and reality that markets may behave irrationally, and there isn’t much that any individual can do about that except to turn off all risk and take cover. If you do that, good luck trying to decide when and how to get back in. We’ve all seen the data in terms of investor returns if you miss the few biggest rally days in any given period. You’ll also notice that the best periods for market-driven returns is typically just after the worst one. This underscores the risk and significance of timing. Who was ready to dive into the markets with both feet in March 2009?
Testing along the way
Another way that you can talk to your clients about volatility is to stress test their financial plan. You can run “what-if” scenarios regarding the variables not going in their favor. You may test for a higher inflation scenario, portfolio losses, or higher spending.
During times of volatility, you may end up revisiting many of these same tools that you used at the start of your planning relationship to see if anything has altered. In prior years and market corrections, we’ve re-tested some clients’ risk tolerance. For the most part, there were no material changes in their tolerance for risk. In my experience, the investors who get spooked by volatility were frequently the more conservative investors whose portfolios were moderate to low-risk portfolios in the first place.
Your most important role during turbulent times is to be there for your clients. Make proactive phone calls to let them know that you are watching and thinking about them. Hiding or ignoring headline news about losses is not advisable.
You may end up revisiting the portfolio as a whole in terms of how it was constructed based on their needs and tolerance for risk. Show them some of the risk statistics and the consequences of the current market conditions on their financial situation.
Remind your clients that this is one of the few elements in their financial plan that is out of their control. This could be a good time to take a look at some of the Callan charts that show the sector leaders and laggards in year-by-year format. This underscores the unpredictability of investing and helps your clients to understand why diversification may be helpful in any given year. Of course, diversification is also no guarantee against losses or better performance.
For the most part, the financial planner who has been practicing proactive and holistic financial planning is probably not receiving a lot of client calls when markets get volatile. Their clients have learned to appreciate their planner because of all the other good things that the planning team has done for the family. That doesn’t give you a pass for lousy investment performance, but it sure takes the pressure off when they know that you’ve got their best interests at the top of your list when delivering advice, including investments.
John P. Napolitano, CFP, CPA, PFS, MST, is CEO of U.S. Wealth Management (www.uswealthnapolitano.com) in Braintree, Mass. Reach him at Johnpnapolitano on Linkedin or (781) 849-9200.