Sinking or Surging: 5 Takeaways for Clients and Advisors During Market Volatility
From: financial-planning.com
It’s too late to sell and too early to buy, which means most investors should be sitting tight.
How can you keep clients from making panicky decisions in the days ahead? As of Monday’s market close, the S&P 500 was down 11.2% from its all-time high, officially in a correction, and yet rebounded at Tuesday’s open. Your phone may be ringing incessantly and your inbox overflowing. Buy?? Sell?? Hold??
Your clients may pay you every year, but it’s at moments like this that you prove your worth. Up or down, here are five vital takeaways to remind your clients of (and perhaps yourself):
COUNT THE CASH
For rational investors, the past week’s stock market declines have no immediate economic impact — unless they need to sell shares to buy groceries. How can you drive home this point? If you have retired clients, add up their bond and cash holdings, and compare it to their desired portfolio income. There’s a good chance they have at least five years of portfolio withdrawals sitting in conservative investments, which is plenty of time for stocks to recover.
Meanwhile, your clients who are still employed have a paycheck to cover their living expenses, so they also don’t need to sell. In fact, their regular income is like collecting a generous stream of interest from a massive bond portfolio. So what if their stocks are worth a little less? They still have their bonds — both the ones you bought for their portfolio and the one that generates their paycheck.
LOOK LONG
The markets anticipate the future, but the future that’s being anticipated is typically just 12 months’ away. The Chinese economy appears to be slowing, though it’s far from clear how bad it’ll get or what the impact will be on U.S. economic growth. Still, twitchy securities analysts, market strategists and money managers — who are fretting over their own investment performance for this year and next — figure it’s better to be safe than sorry, so they’ve been heading for the exits.
You should explain to your clients that the future that concerns them isn’t arriving next year. Their time horizon is completely different from that of the Wall Street investment community that’s driving today’s market volatility. So what if the economy dips into recession and corporate earnings take a short-term hit? By the time your clients need to sell stocks to pay living expenses, this month’s market indigestion will be long forgotten.
If your clients need further reassurance, remind them about late 2008 and early 2009. At the time, many television talking heads feared the financial world was on the verge of collapse. Those who ignored the babbling, and stuck with their stocks, have seen their portfolios triple in value since early 2009.
CHRISTMAS COMES EARLY
People run screaming with excitement to the mall whenever there’s a sale, and yet run screaming with terror from the stock market whenever there’s a sale. This makes no sense.
If you use the shopping analogy with your clients, you might admit that it isn’t perfect. The jeans that you can buy for 50% less on the day after Christmas are the same jeans you could have bought a few days earlier at full price. By contrast, share prices have fallen because there’s concern that the fundamental value of U.S. corporations has also declined, with corporate earnings likely to grow slower than expected.
That may be true. Still, share prices are down almost 10% over the five trading days through Monday’s market close, but it’s inconceivable that the fundamental value of U.S. corporations has also deteriorated 10%. Change in the real economy simply doesn’t happen that fast. The upshot: Stocks must be better value than they were five days ago, so clients should be more enthused about their holdings, not less.
THINK LIKE A BOND INVESTOR
If bond prices fall, driving up yields from 3% to 3.5%, investors immediately grasp that bonds are better value. How can you get clients to see the same silver lining in tumbling stock prices? You might discuss how much in corporate earnings they are buying with every $100 invested.
What we’re talking about here are earnings yields, which are the reciprocal of price-to-earnings ratios. Instead of dividing a stock’s price by its earnings per share, you divide the earnings per share by the stock price.
