Amid raging wars and government dysfunction, it’s no wonder that some investors fear a stock market collapse. They figure the worst is yet to come. This puts financial advisers in a familiar role: handholding.
Bracing clients for loss is a delicate dance. Advisers need to provide long-term reassurance while setting expectations for further short-term portfolio pain.
Seasoned advisers train their clients to handle steep losses without throwing a fit. They repeatedly urge jittery investors to “stick with the plan” and “ride out the cycle.”
But emotions can get in the way. “Right now, most people are thinking borderline apocalypse,” said Cameron Valadez, a certified financial planner in Riverside, Calif. “There are so many global issues going on. But when you look back, you see so many crises. It felt the exact same at the time as it does today,” yet the crises passed and markets recovered.
From experience, Valadez knows that providing a detailed history of the market’s resilience probably won’t address a client’s concerns. “You can’t throw out lots of statistics and financial jargon,” he said. “It’ll go in one ear and out the other.”
Instead, he uses simple graphs or basic facts to calm anxious investors. For example, he shows them a graph of S&P 500
performance from 1970 to the latest quarter. “You can see how the market has grown substantially through all the market crises, about 50 of them, since 1970,” he said.
He may also point out that since 1937, the S&P 500 has a 93% chance of producing a positive return over any five-year period. For retirees worried that they lack enough time to outlast a sustained downturn, Valadez tells them that the S&P 500 has a roughly 88% chance of positive performance over any three-year stretch.
“They think things will get worse and worse and worse and then their money will run out,” he said. “Often, that’s the root of their fear.”
Part of the challenge for advisers is helping clients feel a sense of control over calamitous events that spiral out of control. Because their clients took preparatory steps to withstand shocks, they are more likely to face crises without panicking over money.
Eric Amzalag, a certified financial planner in Woodland Hills, Calif., guides new clients through an exercise using “Eisenhower squares.” Also known as the Eisenhower matrix, it involves drawing quadrants and labeling each box based on what’s urgent and/or important.
“It helps focus client’ priorities on things that are urgent and important,” Amzalag said. “Then they can focus on behavior-based things that are under their control.”
For instance, funding a client’s emergency cash bucket is both urgent and important. It’s the key to limiting damage in a market rout. “So when crazy things happen in the world, they have a frame for it,” he said. “And that keeps them aligned with the proper behaviors” so they don’t resort to panic selling.
Inexperienced advisers may try to calm anxious clients by appealing to logic. But that rarely works if someone’s too emotionally wound up to listen. “When I first started as an adviser 16 years ago, I’d make the mistake of thinking that what was on my mind was the same thing that was on the client’s mind,” said Rene Bruer, a certified financial planner in Colorado Springs, Colo. “But I learned that what’s triggering their fear can be totally different.”
Bruer soon learned to adjust his approach. Rather than assume he understood a client’s fear, he started asking open-ended questions and then keeping quiet.
To manage client emotions during plummeting markets, Bruer follows a two-step process. First, he writes an email urging clients to maintain perspective. He might remind them that they have diversified portfolios while other investors lack such diversification. Or that his clients know not to time the market with frenzied buying and selling decisions while other investors compound their losses by making rash trades.
A few days after sending the email, he will call clients and say, “Just checking in. How are you doing given what’s going on?”
As they open up about their fears, he doesn’t offer false hope. Indeed, he shares their concern. “I’m feeling the pain with you,” he might say. “Still, I’m not making any moves to my portfolio. And I don’t recommend that you make any moves in yours.”
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