Market volatility is top-of-mind for clients who still can't relax, five years after the 2008-2009 stock market meltdown. Investors worry that the five-year bull market in stocks could suddenly turn.
Clients' worry about market swings even outpaces the fear of running out of money in retirement, according to a Russell Investments survey of advisors.
The reason? Many investors can’t erase memories of 2008, said Scott E. Couto, president of Fidelity Financial Advisor Solutions. The Dow Jones Industrial Average dropped 54 percent between October 2007 and March 2009. After that dive, the market has risen 133 percent from March 9, 2009 to Sept. 29, 2014.
“Losing hurts worse than winning feels good,” Couto said. Many older investors are particularly cautious because they are taking retirement distributions, or will need to do so soon.
Helping Clients Relax
Advisors can ease clients' fears by describing market swings in a long-term context, Couto said. For example, advisors can share statistics with clients to show how long it typically takes for markets to rebound after a downturn, and how stocks have yielded decent long-term returns, despite fluctuations.
Other strategies include holding the equivalent of a "Back to School" night for advisors to tell clients what to expect for the year, said John Anderson, a consultant for SEI Advisor Network in Oaks, Pennsylvania, who counsels advisors on running their practices.
Advisors can also prepare clients for future risk, Anderson said. For example, advisors could show estimates of how much money clients would lose if the S&P 500 stock index dropped 20 percent, 30 percent or 40 percent. That could prompt clients to switch to less volatile investments or at least assess their risks.
That type of groundwork is part of every first meeting with new clients for Robert Schmansky, a financial advisor in Livonia, Michigan. Most clients, as a result, never ask about market fluctuations, Schmansky said.
Schmansky's strategy uses stocks to maximize growth, while balancing portfolios with less volatile assets such as Treasury Inflation-Protected Securities (TIPS) and short-term bonds.