That is the easy part. The real challenge is how to respond to what appears to be both a volatile and falling market. How do you remain focused and clear headed enough to ensure the best outcomes for your clients? And what are some of the strategies and tips that you should consider?
Stick to your investment model and processes
Investment models and processes are there for reason. They support the longer-term nature of an investment and are not intended to chase returns or to avoid shorter-term challenges.
Certainly, you may wish to review your clients’ risk profiles. It is always worth assessing whether or not their appetite for risk has grown or diminished. Likewise, it is worth reviewing their capacity for loss. Personal circumstances may have changed and had an impact on this too.
However, where possible keep the portfolios you have agreed for the longer term if they still meet a client’s risk profile. To allay a client’s nerves, it is worth reiterating how the funds work within the client portfolio and relate to their objectives, as well as going over how they are managed.
You should also explain the bounce-back opportunities. You can use historical bounce backs as examples but do highlight that history is only an indication and that you can not guarantee there will be a bounce back or foresee when it might happen, if it does.
Whatever you do, do not be tempted to try and call the bottom. It is very difficult to do and you are more likely than not to get it wrong.
Do not have unrealistic expectations and be open with clients
Explain to clients that they should not expect too much from investments in the short term – that is, the next couple of years. And make sure they are clear that some investments will fall further before recovering.
Cash flow modelling is useful if you want to use a visual aid to show the impact of a bear market followed by a bounce back on the longer-term value of investments and portfolios.
You will also want to look at the level of diversification within all your clients’ portfolios as well as their overall and other savings and holdings.
The steeper the loss, the bigger the climb to get back to even
So-called market corrections, in which markets fall between 10 per cent to 20 per cent over a short period of time, are relatively routine and occur every couple of years. What investors need to be wary of is a bear market that is associated with a recession or a crisis, which can see markets fall 30 per cent or 40 per cent. When markets fall steeply, the recovery is harder. For example, to break even a loss of:
- 10% requires a gain of 11%
- 20% requires a gain of 25%
- 33% requires a gain of 50%, and
- 50% requires a gain of 100%.
Recovering from big falls therefore demands time and patience. This is, of course, an easier task for those who are young than it is for those who have retired and who are using their investments to supplement their lifestyle.
