The past few years have been a market watcher’s dream. The 2016 election, Brexit and recession fears sent stocks pin-balling to impressive extremes both high and low. But from your clients’ perspectives, these gyrations may have been sweat-inducing enough to send them straight to safer assets, like cash.
It’s an age-old story: Every good advisor knows that participating in the market can be an essential part of helping clients meet their goals for growth and income. Yet, you also know how clients can get spooked by market volatility. Their desire to feel safe from risk can entice them into making decisions based on emotions. In fact, clients are holding $13.4 trillion dollars of cash on the sidelines today – up 5.5% year over year.1
So how can you cut through your clients’ internal monologue, the one that’s preventing them from stepping into the market, and help them balance risk and reward? Here are my best tips for helping them bring their fears out into the light and test them against the facts.
Have an honest huddle about retirement risks
Clients who hold a great deal of cash like the feeling of security they get from seeing a certain balance in their bank account. Yet it’s worth helping them remember the adage that it’s the risks you don’t plan for that may get you in trouble. With clients living longer and fixed income providing lower returns, the old standby of the 4% retirement withdrawal rule may no longer hold up.2
Clients may need help seeing that if they aren’t making the most of the lower-risk assets in their portfolios, they may not be prepared for rising healthcare costs and other unexpected retirement expenses.
Your suggestion: Help them explore possible alternatives to the lower returns of fixed income vehicles, as well as cash holdings, with solutions that may also help protect their investments from market downturns.
Review potential growth opportunities
Clients also need to realize that holding onto cash can prevent them from moving forward on the march toward their retirement income goals. Over time, taxes and rising inflation can decrease assets and buying power. As a result, the same amount of cash may make clients feel less emotionally secure each year. Of course, they’re not alone in fearing market losses, especially as they approach retirement: 80% of Americans think it’s especially important for people over age 50 to have a strategy to protect against investment loss.3 Yet you can show them options that may fit with their need for certainty and protection.
Your suggestion: Help them explore how guaranteed income and growth potential can go together.
Show them why to get on the field
You know that market timing hurts, but clients may need to see the proof. It can be easy to second-guess exactly when to enter the market, but strategies like dollar cost averaging may help clients ease in. And over the long run, one of the best market strategies is to be patient.
It pays to stay invested
Over the long term, emotional investing and market timing can lead to underperformance. Compare the average investor returns to that of the S&P 500 over the 20 years from 1996 to 2015.
Source: DALBAR, Inc. Quantitative Analysis of Investor Behavior, 2016.
Average equity investor performance results are calculated using data supplied by the Investment Company Institute. Investor returns are represented by the change in total mutual fund assets after excluding sales, redemptions and exchanges. This method of calculation captures realized and unrealized capital gains, dividends, interest, trading costs, sales charges, fees, expenses and any other costs. After calculating investor returns in dollar terms, two percentages are calculated for the period examined: Total investor return rate and annualized investor return rate. Total return rate is determined by calculating the investor return dollars as a percentage of the net of the sales, redemptions and exchanges for each period. The S&P 500 Index is a price index and does not reflect dividends paid on the underlying stocks. It is not possible to invest directly in an index.
1Federal Reserve, St. Louis Fed. Guide to the Markets – U.S. Data as of April 30, 2017.
2David Blanchett, Michael Fink and Wade Pfau. "Low Bond Yields and Safe Portfolio Withdrawal Rates." Morningstar, January 21, 2013.
3Greenwald and Associates, Guaranteed Lifetime Income Study, 2016.
All investments come with the risk of losing money, including possible loss of the capital.
ABOUT THE AUTHOR
For more than 26 years, Christopher H. Price, JD, LLM, CLU®, ChFC®, AVP, Advanced Sales, Lincoln Financial Distributors, has helped financial professionals and their clients accumulate, distribute and transfer annuity assets by using a holistic approach. In 1983, he began his career as a trust officer with Sovran Bank (now Bank of America). Chris moved into financial planning and followed that by managing an insurance agency that served some of the wealthiest families in the country. In 1994, Chris joined Delaware Investments, formerly a member of Lincoln Financial Group, where he was responsible for the product management of Delaware mutual funds and eventually Lincoln variable annuities. From 2000 to 2004, Chris used his expertise to help financial professionals and their clients with advanced case issues. In 2005, he transitioned to the Lincoln Advanced Sales team. Chris holds a BA in history from Vassar College, and law and master’s degrees from the Marshall-Wythe School of Law at the College of William & Mary.