While last time I wrote about clients who become more optimistic as the bull market streak continues, there are also those clients who are notoriously glass-half-empty thinkers. With an eight-year bull market run and a consecutively positive 2017, these are the clients who feel that we’re due for a downturn, and are waiting with bated breath for the proverbial other shoe to drop. What can you do for clients whose strategy is to quit while they’re ahead?
Put Away the Crystal Ball
We say it all the time: Past performance is not indicative of future results. That means that a positive streak is not guaranteed to continue, and having a long positive streak does not indicate that we’re “due” for a downturn. The simple fact is that studying past performance won’t help investors predict what’s next, so they have to stop trying. Tell your clients not to focus on timing the market, but to focus on time in the market. What’s important is not trying to best the market, but rather focusing on the ultimate goal and allowing investments to compound year over year.
Make and Stick to a Plan
According to the concept of loss aversion, people prefer avoiding losses to acquiring gains. The instinct to protect their assets could cloud investors’ judgment and lead them to make anxiety-driven, defensive decisions. A clear, diversified plan is key with these (and all) clients, and it’s up to you to show them how their plan is designed to weather the changing markets, and to explain why moving in and out of the market could be detrimental in the long term.
That said, if both you and your client believe that a given asset class in the portfolio has met and exceeded your investment goals, perhaps both of you would feel better if you reallocated some of that money to a new, potentially exciting opportunity or merely moved it to a more conservative position until that opportunity arises. Sticking to a plan doesn’t mean staying in an allocation without fundamental reasons, but it does mean planning over the long-term to meet investor objectives.
Practice the Art of Patience
Investing is a long-term game, and there will always be ups and downs. It’s not like gambling, so getting out once you’ve done well might not make sense. Continue to remind clients why they invest—it isn’t so that they can make a quick buck today, but rather so that they can build towards a bigger, wider range life goal. Investing takes patience and long-sightedness, so help clients look past the trends to detract them from making any impulsive decisions.
Whether you have overly optimistic or overly pessimistic clients, the same core ideals apply: we can’t predict the economy, a diversified plan is important, and focusing on the long-term goal can help mitigate anxiety.
All investments are subject to risk, including the possible loss of principal. Diversification does not ensure a profit or protect against a loss in a declining market.