Investing is not a contest. This is related to the previous truth, but slightly different. In this case, the client or prospect wants to beat some index, such as the S&P 500, or to have "bragging rights" at a cocktail party. To illustrate the folly of such a goal, we may ask if they would be happy if they lost 20% but beat the S&P 500, which lost 22%. We try to convince them that obtaining a return that has a high probability of them reaching their goals is what is most important. Let the money managers who are paid bonuses based on their performance relative to some index obsess over that. The reality is that it has little if anything to do with the achievement of our clients' goals in life.
There is a great deal of difference between risk and market fluctuation. Risk, the way we define it, is running out of money before you run out of life. Fluctuation is what may occur during the interim. The greatest risk is allocating a portfolio in such a way that it avoids fluctuation but guarantees a return so low it assures that the client's money will not last. While a portfolio that invests a larger percentage in equities may provide more short-term volatility, it may be less risky than the "stable" portfolio.
It's OK for clients to invest most or even all of their money in fixed income. This may seem to contradict the market fluctuation comments made above, but it is different. If a client can reach all of her financial goals in life and avoid market volatility, there is nothing wrong with this strategy if it is what will make the client comfortable. After all, why do people invest in the first place? Is it to accumulate money to watch it grow, or is it to reach their financial goals? We believe it is the latter.
Clients don't fire financial planners because of market fluctuations. That is, unless their advisors have claimed to be money managers immune from normal (and abnormal) fluctuations. It's all about delivering what you promise and not promising unless you are confident you can deliver.
Most individuals who act out of greed are not greedy. Many people spend too much time listening to the so-called "experts" who, with the advice they provide through the media, encourage people to seek the highest return they could (asking, "What is the hot stock this week?") As a result, many clients want to chase returns because so many people tell them the objective of investing is to maximize returns. When these clients are educated properly, it is the experience at our firm that they will invest in portfolios that mirror their unique goals instead.
"Stay the course" is not blanket advice. Clients are unique, and in times like those we've just experienced they need to be treated uniquely. There were clients who needed to experience the recovery whenever it occurred, so they needed to stay fully invested or even to increase their exposure to equities. For these clients, "stay the course" may have been appropriate advice. However, there were many other clients who were agonizing over market volatility and did not need a recovery to reach their goals. They were advised accordingly.
Disciplined saving to reach long- and short-term goals is far more important than investment returns. We need to encourage our clients to maintain a saving strategy, particularly when markets are not performing well.
Clients will forgive us for poor returns during down markets, but not for failure to understand them or their goals.
The odds of success (as calculated by Monte Carlo simulations, etc.) literally change every year, every quarter and even every day. Our clients need to understand that a 90% probability of success this year may very well be 60% next year if the clients spend more than they expected to, earn less, achieve below-average returns or experience any one of myriad other variables. This is one reason why regular reviews and updates are essential.
Retirement is not mandatory. Financial planners need to change their question from, "When do you intend to retire?" to "How do you visualize your life in your 60s, 70s, 80s and beyond?"