As serendipity would have it, “Handle with Care” by the Traveling Wilburys was playing in the café where I ducked out for coffee today. The first line, “Been beat up and battered 'round,” sure seemed to describe recent markets. The song reminds me of a story I read where George Harrison explained how he came up with the title while looking at a box in the recording studio marked, “Handle with Care.”
Today, the same goes for our clients. While they may understand that their diversified portfolios are built to withstand market swings, their emotions may sometimes get the best of them. I use the following techniques to reassure clients and keep them appropriately focused on the long-term:
- Get out in front of the crisis.
When volatility strikes it’s important to reach out with information and reassurance rather than sit back and wait for worried clients to call you. Therefore, that afternoon on Aug. 21, I sent an email to all clients and prospects with the subject line: “The Recent Fall in China's Currency and Coping with Volatility in the Market.” I answered questions about any direct and indirect of the impact of market events on client portfolios. My conclusion: “Our investment approach has not changed as a result of this news or the volatility in the markets. We emphasize the importance of broad diversification, efficient portfolio design and execution, and consistent asset class exposure as the most reliable means of capturing market premiums that can offer investors higher expected returns and minimizing downside risk.”
- Combat a fear of numbers with more numbers.
Notably, when I emailed clients at noon that Friday, even with the week’s losses, stocks were down only about 2% for the year. But, big losses in the headlines have a way of fueling worry. This time around, I’ll remind clients of 2011 when the Dow fell 635 points on Aug. 8, only to rebound 430 points the next day. That was followed by another 520 point dive the following day and an increase of 423 points on Aug. 11. Of course, past performance is no guarantee of future results. However, historical performance does illustrate that we’ve experienced similar volatility before and eventually recovered. My point is that the markets reward discipline. For example, one dollar invested in the MSCI World Index (net dividends) from 1970 until 2014 is worth $45 today, in spite of events including the oil embargo and S&P 500 drop of 45% in the 1970s, the dot-com bubble, the subprime mortgage crisis when the S&P 500 tumbled 46%, and the government’s fiscal cliff crisis.
- Appreciate that there’s no greater fear than the fear of the unknown.
Fear can freeze an investor like a deer caught in headlights. As trusted advisors, we need to ensure clients have the ability to move forward in a positive way in spite of so many uncertainties in the current market. Will the volatility continue? Will the Fed raise rates? We don’t know. However, we still need to stay committed to our plan.
To remind myself of the decision paralysis investors often face when the environment is so uncertain, I often review an experiment conducted by the renowned behavioral finance researchers Amos Tversky and Eldar Shafir.
Tversky and Shafir asked three groups of people to imagine they had just played a game that gave them a 50% chance to win $200 and a 50% chance to lose $100. The researchers told the first group that they had won the gamble, the second group that they had lost, and the third that they wouldn’t know the outcome of the game until later. Knowing what we know about loss aversion, we might assume the group that was told they lost might fold if offered the chance to play again. However, the experiment revealed quite a surprise. A majority of the winners and losers of the initial gamble agreed to play a second round of the game. However, the majority of those who didn’t know the outcome of the first gamble chose not to play.
These results clearly illustrate how uncomfortable we are with uncertainty. We like to know the score. When outcomes are uncertain, people wrestle with making decisions. In our business, clients can begin to question whether to move forward funding their plan.
I don’t want clients to feel that they must make decisions in direct response to the current volatility. My caution to clients is simply not to disengage with their plan because we build our diversified portfolios to withstand market volatility.
- Focus your attention where it’s needed most.
You might be inclined to target your younger or newest clients with your volatility outreach. In reality, clients a decade or so away from retirement are probably the most vulnerable to stress from these market swings. After all, they have less time to make up any losses before they begin taking distributions from their portfolios in retirement. The fear of additional losses may cause them to question their long-term investing goals. They may even suggest contributing less to their retirement accounts at the very time the IRS’ catch-up provision allows them to contribute more. Significantly reduce their equity exposure can also harm their long-term goals.
Above all, be honest when addressing volatility. That means admitting we don’t know what will happen next. We advise clients to stick with their properly diversified plan and not to view volatility through an intra-day, intra-week, or even a quarterly lens. Focusing on the news headlines always comes at the expense of personal goals.
As with any relationship, consistency is always a comfort in times of stress. And our investment approach has not changed as a result of the increased volatility in the markets. We make changes in our clients’ portfolios when their goals, time horizons or risk tolerance change.
In conclusion, to quote the Traveling Wilburys again, no matter what happens in the market, your clients need to know they’ve “got somebody to lean on.”
Kimberly Foss, CFP, CPWA, is a Financial Planning columnist and the founder and president of Empyrion Wealth Management in Roseville, Calif., and New York. Follow her on Twitter at
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