Investors are getting comfortable with the extended bull market. So comfortable, in fact, that it may be a good time for advisors to talk to them about the next crisis.
So says investment executive Andrew Crowell, who believes that the calm periods are the best time to prepare clients for when all hell breaks loose.
“Another correction is inevitable, so it’s better to think about it in advance, when you and the client have clarity of mind,” says Crowell, vice chairman of D.A. Davidson & Co.’s Individual Investor Group.
Complacent clients are more likely to panic and make bad decisions when a crisis hits, Crowell notes.
“Talking about corrections helps people to understand how their plans will behave during all of that volatility,” Crowell says. “It helps us not to worry that a drawdown will be so extreme that our clients will bail out at an inopportune time.”
It's important that advisors frame the correction conversation before cable news investment gurus instill clients with the kind of fear and uncertainty that might jeopardize a financial plan, says Crowell, pointing out that 16,000 baby boomers enter retirement every day—a pace expected to continue for the next 15 to 20 years.
The way much of the planning industry discusses risk falls short of addressing investor behaviors, says Crowell.
“I think we’ve gotten too caught up in the theory behind financial planning and we’re not going deep enough into the practice and in creating tangible illustrations for our clients,” says Crowell. “We’ve become too theoretical and not practical enough.”
The current market environment is like a lulling walk among the poppies for many investors. Volatility remains low, and with the exception of a few sputters here and there, the eight-year bull market continues unabated. But political uncertainty and elevated equity valuations continue to worry some market analysts. Even through the bull market, corrections or market declines of 10 percent or more are not unheard of. The recent decline in technology stocks briefly entered correction territory. Statistically speaking, a correction across broader markets is almost inevitable: Between 1900 and 2013, at least 123 corrections occurred.
Earlier this month, JP Morgan alerted investors to increasing probabilities for a summer correction. Not to be outdone, DoubleLine founder Jeffrey Gundlach also predicted a correction in equities this summer, which happens to be the season when some of the largest recent corrections has taken place.