I spoke with an airline employee recently who told me that itís all a part of being top-of-mind in case of an emergency.† He further added that if something goes wrong during the flight people typically panic and act irrationally. Being reminded recently of what to do helps people do the right things in a crisis.
Advisors need to be prepared to help their clients through a crisis. Hereís the wealth advisorís safety briefing:
- The average 62-year-old couple has a joint life expectancy of 30 years.
- Humans make emotional decisions and itís your job as their advisor to help manage them.
- Stock and bond markets go up and down in the short term, but have trended up in the long term.
I have gathered some data to help you frame the discussions with your clients. We analyzed the S&P 500 data of monthly returns from 1926 through 2012, which means we have 1044 monthly returns, and more specifically we have 58 thirty-year periods we can use to look at an average 62-year-old coupleís investment experience.† On average, there are 6.5 declines of greater than 10% over the course of a 30-year investment period, or once every 5 years.†
The flip side of that coin, however, is that the annualized rate of return over the 30-year periods range from a low of 8.5% from 1929-1958 to a high of 13.7 from 1975-2004, according to DFA Returns 2.0. Both of those numbers fit within the expected long-term rate of return used by most financial planning software.††
A good advisor uses this information to help their clients prepare for these three realities:
- The money has to last for a while.† The average 62-year-old couple will need their money to be around for at least 30 years, so keeping a long-term perspective is essential.† Historically, the stock market, as measured by the S&P 500, has ranged from 8.4% to 13.7% over calendar-based, 30-year periods.
- People will be emotional when it comes to their money and their future based on current situations. Stock and bond markets have steep declines and quick rises which tug at two powerful emotions: fear and greed.† An advisorís #1 job is to manage these emotions so as not to derail the clientís long-term objectives.
- Stock and bond market declines have occurred ó and will continue to occur ó frequently.† The more time you spend preparing your clients and helping them manage through them the better off you ó and they ó may be.
Bottom line, expect down periods.† Expect a 30-year investment horizon for the average 62-year-old couple.† And expect to manage more emotions than money during your time as an advisor.
Steve Atkinson is EVP and Head of Advisor Relations at Loring Ward, www.loringward.com, a third-party asset management program (TAMP), with over $8.4 billion AUM. His team is dedicated to helping the independent advisors who partner with Loring Ward to grow their businesses through ongoing support and coaching.†Practice management resources and tools area available at www.loringward.com/advisors.