In mid-October of this year, an advisor called me to ask my advice. “How long should I wait before contacting my clients about this substantial market drop?” he asked. “I don’t want to seem to be overreacting to the situation. I figure if I wait a few days, things may blow over and we won’t have to have the conversation at all.”

On October 15, the market had indeed dropped 7.9%, the second biggest one-day drop since 1987. The advisor couldn’t have predicted that by the end of October, we would again reach positive record territory.

I’ve known plenty of advisors who avoid contacting clients immediately after a significant correction, preferring to “wait it out” to see what happens next. If there are more than a few days in negative territory, they will consider sending e-mail or a letter. If it plunges further, they may make a call or just hide. Personally, I believe that when there is an elephant in the living room, praying that it will go away before you have to clean up after it is probably Webster’s classic definition of denial. You control client behavior with your call, not without it.

In light of this recent dramatic one-day loss, it’s probably time to revisit your process around responding to frightening short-term volatility, though. It’s important to have a process so that you are not unprepared when this happens (you know it will happen again).

In advance of a major investment in the market, many clients fear that as soon as they do invest, the market will crash. This behavioral finance heuristic is known as “anticipatory regret theory,” which is anticipating and regretting an action before doing it. Behavioral heuristics or “mental shortcuts” frequently occur when people, as Daniel Kahneman suggests, are making decisions under uncertainty.

One way to try to counter this thinking is by saying something like this: “I know what you’re thinking; as soon as we invest your money, the market will collapse, and you’re right! As soon as we invest your money, the market will go down 20%, and it will be your fault. Not only that, we will send letters to all of our other clients telling them that it’s your fault.” It is amazing how much impact that line has always had. Intellectually framing the absurdity of these thoughts often works to ease a client’s mind about the uncertainty.

The day after the 7.9% point drop, our advisors were on the phone once again assuring everyone that Apple is still in business, the phone’s still working, and people are taking pictures at Disney World. Our clients are used to this dialogue too. “No, I’m not worried; I know I have enough cash in reserves to last for about a year of my expenses. I have to go now; I am taking my grandchildren to lunch.” These were the easy calls.

For clients who were a bit more uncomfortable, we prepared some on-the-spot stress-testing sensitivity analysis to see just how far down their portfolio could go before they headed for the windows. We used the sensitivity analysis feature in MoneyGuidePro, continually adjusting the expected returns downward until the client blanched. We reminded our clients that the funds they have in the domestic stock market are the funds they will need in the distant future. “In order to get market returns, you have to be in the market.”

Framing the event is essential. Reminding them that this isn’t the only market out there is a good way to do that. “This is only one of the markets you are in. Here’s what’s happening with the others … .” This gives us an entrée to discuss asset allocation, diversification and other theories they won’t remember. They will remember, however, that we called to talk and that’s the important part of the process.

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