By mid-morning of that day, it was clear that our most important call of the day would be to our newest client, who had just dumped a million dollars into a market that dropped 7.9% the following day. I’d love to tell you that this was the first call we made, but it wasn’t. We weren’t avoiding it either; we just needed to plan it carefully to make the best impact. We purposely waited until midday so that we didn’t convey a feeling of panic. We’re not insensitive to pain; however, it is important to think through how you manage stressful events because this is where you set the tone for the continued relationship. If you overreact or panic, your clients will too.

The difficult conversations come when clients are new to the firm, haven’t experienced much market volatility or are just generally skittish. That’s when having an investment committee meeting to strategize the discussion is invaluable. Once again we used our sensitivity analysis to determine the impact on the portfolio. The client was not taking money from his investments (his IRA account) and would not be taking his money until his required minimum distributions in about 20 years. The expected real rate of return for his portfolio was 4.8%. If the market were to turn much uglier for the rest of the year and actually tank 20%, then be followed by a second year with a 10% loss, we estimated the client would still just about be on target. That’s assuming we made no interim adjustments to his plan, which, of course, we would.

As only 60% of his portfolio was in equities, we also pointed out how unrealistic such a loss scenario would be.

We also felt that it was important for us to use this event to demonstrate how volatile markets can be over the smallest event. The media quickly announced that the drop was precipitated by weak retail sales and dour market forecasts by the Fed. The market reacted by wildly selling. I always try to explain these events in ways I think my client will respond to. So my explanation of the drop that day was something like this:

As a kid, my sister was a smart, adorable little devil who constantly got into trouble, blaming every one of her bad actions on my 2-year-old brother. “Bobby did it,” she would say, looking straight into my father’s face. Once my sister climbed up onto the kitchen counter, grabbed a handful of freshly frosted cake and jammed it into her mouth. To ensure his guilt and her innocence, she wiped her hands on Bobby’s face, leaving streaks of frosting everywhere. “Bobby did it,” she carefully explained, paying no attention to the trail of cake on her own hands and dress.

Truthfully, I think the market drop might have been due to the many investors who felt that the market was overvalued or who wanted to take some profits. Others might simply have been looking for an excuse to reduce their equity exposure. Since huge market movements are seldom at the hand of individual investors, I suspect the money managers also needed a good excuse, so they blamed it on the Fed. Whatever it was, you now know how vulnerable to chance the market can really be. This was not on anyone’s radar.

By the end of our investment committee meeting, we had our talking points, our tone and our attitude; we were ready to talk to the client. “Mr. Barstow,” I began, “I am sure you noticed the hiccup in the Dow Jones yesterday, and that’s why I am calling … .”

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