Making the most of the calm before the storm

By Guest |  14-05-20 | 
 
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Morningstar invites thought leaders from the investment community to share their insights. Views expressed are personal and should not be construed as investment advice.

Has this market bounce set a trap for your clients (and for you)?

There was that precipitous drop in March that got you scrambling. Suddenly you were under quarantine. You had to coordinate with staff at their homes. And you needed to call all your clients and provide them reassurance as the market plummeted.

Thank goodness that’s over! Except…

Imagine yourself on a roller coaster in a thick fog. There is that initial drop. You have no idea where it will end. And suddenly, you feel a lot of extra gravity as you round the bottom of the ride and start heading up again. Scary, but it’s done. There may be a few more bumps along the way, but soon you will be pulling into the end of the ride and you’ll be able to get back onto solid ground again.

How much more terrifying will that second drop be if it is just as large and you never saw it coming?

Bear markets are roller coasters. They don’t simply go down and stay there. There are lots of ups and downs before they are over. I’m not going to provide you a forecast or make any investment recommendations. But I will share my observation that I cannot find in the research a bear market that was done in two weeks. Odds are there will be more significant downdrafts. Regardless of your investment philosophy, you have an opportunity to help your clients.

Envision that roller coaster again. Except, this time there is no fog. You can see that after that initial drop there are several more ups and downs, equally large, before the ride is over. It’s still scary. But a lot easier to take if you have a sense of what’s coming.

The bottom of the market is characterized by “capitulation.” That’s where many investors throw up their hands and say “That’s it! I can’t take it anymore. Take me out.” And then miss a lot of the next bull market.

This is the opportunity to reach out to clients and let them know there may be a lot more to come. And, knowing that, you can discuss whether any adjustments are called for to help them stick with the program long-term. Here are a few things you might discuss:

  • Prepare clients for the possibility of another big downturn. Taking the surprise out of it can help them stick with it.
  • Ask them how they felt in March or when they opened their first-quarter statements. Ask if something like that happened again soon if they could hang on. If not, maybe it’s better to move a little more to the side now. Better to miss some potential opportunity then to capitulate and miss it all.
  • Identify opportunities to take advantage of the next drop. Tax loss harvesting. Roth conversions. Whatever silver lining there might be as the market goes up and down.
  • Give clients a preview of what you are watching for and what you will do in response. Having an active strategy, even if it is only when you would rebalance, build confidence.

Forewarned is forearmed.

Let clients know you are actively monitoring and have a strategy. That you are not just a spectator. The surprise is worse than the decline. So discuss the possibility now. Help your clients feel prepared.

This post by Stephen Wershing was first published on The Client Driven Practice.

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