To be sure, Friday's stock market sell off was serious a 530 point plunge in the Dow Jones Industrial Average, representing a 3% loss for the day and 10% off the market's high in May, all in the midst of $3.3 trillion global equity wipe-out driven by fears about China's sputtering economy, is sure to get clients' attention.
All the more reason for financial advisors to stay calm and help clients focus on the big picture, say financial veterans.
"I've seen this so many times over the last 25 years," says Greg Friedman, chief executive and president of Private Ocean, a San Rafael, Calif.-based wealth management firm. "We sent out an email to clients this afternoon acknowledging that while what happened Friday was scary, we believe in our strategy of broad global diversification; that portfolios are appropriate to clients' individual financial plans and that, while big market drops are worrisome, in the long-term it's noise and should have no major import on their life plans."
Still, it's understandable if clients are not immediately reassured, notes psychologist Jack Singer, a speaker, trainer and coach for financial professionals who wrote the book, The Financial Advisors Ultimate Stress Mastery Guide."
Advisors should use a psychological approach known as active listening, Singer suggests, not only to calm their clients, but to also lock up their faith in their financial plan.
"Normally an advisor who doesn't understand active listening says to a client, 'Don't worry, everything will be fine, you have to trust what I've been telling you, Singer says. "But when you initiate active listening, you first just take a breadth and just listen to the position of the client without judging it."
Financial planners should put themselves in their clients' shoes after markets plummet, Singer suggests. "An example of what to say to the client would be, 'I understand you're frightened, that you may outlive your wealth because of the value today of your portfolio.' "
"Once you're on the same page, understanding the emotions of the client, then the client is open to listening to the evidence you can present to allay the fears, he says
LOOK AT HISTORY
Some of that evidence is historical, Azzad Asset Management of Falls Church, Va., points out in a memo it sent today to clients.
Since 1900, there have been 35 declines of 10% or more in the S&P 500, the firm noted in the memo. "Of those 35 'corrections, the index fully recovered its value after an average of about 10 months," the firm stated.
Sure, theres "no guarantee that the length of future recoveries will happen in a similar time frame, or at all," Azzad told clients. "But unless you have a need for the money in the short term, consider just being patient."
Realism is also critical, according to Azzad.
The S&P 500 more than doubled in value from March of 2009 through 2013 with an annualized return of more than 20%, the firm reminded its' clients.
"The S&P 500s average annual total return over the past 50 years is 10%," Azzad continued. "Over the last few years we've seen outstanding results a seven-year bull market. With long-term historical returns of the S&P 500 as a precedent, keep in mind that results like that are unsustainable; your expectations may have become unrealistic.
"Over those last few years, some investors have seen their portfolios double in value," Azzad stated. "It is not prudent to assume that rate of growth can continue. Although there are no guarantees, a 10% average annual return on investment is in keeping with the long-tern historical trend. This pace is sufficient to help you achieve your financial goals an investment doubles in slightly more than seven years at 10%."
Advisors also need to remind clients to be opportunistic, experts say.
"We told clients we are not making any structural changes to portfolios," Friedman says. "But we are looking at rebalancing and tax loss harvesting opportunities."
Reduced prices are also a buying opportunity, says Scott Wren, senior equity strategist for Wells Fargo. "We have to react quickly on days like this," he says. "So we published something this afternoon that said this is a buying opportunity. You should be buying the sectors that have been hit the worst."
Wren acknowledges that's easier said than done for most retail clients.
But he thinks the bull market still has legs.
"If I had to pick the inning we are in in this economic cycle, it's the 7th," Wren says. "So there are more innings to play."
Additional reporting by Ralph Ortega and Andrew Welsch
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