Nobody likes to hear bad news, but there are a lot of tools in the tool box when that bad news is market volatility, according to Boston-based John Hancock Investment Management.

It’s likely that the mantra for the next year or two will remain the same: “The only constant is change.” Even if the Fed pauses its interest rate hikes in light of today’s inflation report, now is the time to calm clients with a historical perspective about what market volatility really does to a portfolio, said Jason McKinney, a Hancock senior vice president and business consultant. McKinney spoke about these issues during a virtual presentation yesterday called “History Lessons: Putting Market Volatility In Perspective For Your Clients.”

“There’s a reason why so many investors around the world do just that with their money—invest it—because when you look at returns historically and compare equity and fixed-income returns to what inflation has averaged, you can see why investing is so popular and so important,” he said.

Looking at the last 100 years, McKinney said that returns are positive 73% of the time, and negative only 27% of the time. The most common occurrence, in fact, is that the stock market ends up more than 20%. And while the long-term average return is 9.7%, the stock market has ended a calendar year up 8% to 11% only four times, he said.

“When investors open up their statements at the end of the year, it’s more likely that they’ll see a positive 20% and even likely they’ll see a negative 20%. So it’s important to make sure that investors understand there’s nothing average about returns,” he said. “It’s a market of extremes in the short run. But in the long run, it smooths itself out to the 9.7%.”

Advisors should set client expectations early and often, reminding clients “It’s not timing the market, but time in the market,” McKinney said, and the longer they’re in the market, the smoother the ride, the better the chance of success.

McKinney offered up a handful of topics about which advisors should have well-memorized scripts.

Does Diversification Still Matter?
A client can look at individual calendar years and sometimes think that diversification didn’t mean anything or didn’t really help their portfolio.

“What that means is that if the client looks at the dispersion of returns between the winner and loser of this group, it wasn’t very wide,” McKinney said. For example, in 2012, the best performer was mid-cap value at 16.6%, while the worst was small-cap growth at 13.2%. “Everything was up, in the double digits. So there’s going to be some years where you could make an argument that it doesn’t necessarily matter. But, there’s the years where it did.”

In 2020, the first quarter saw miserable performance, but the rest of the year had fantastic returns. And when the dust settled at the end of the year, the markets were up in a big way, he said.

“But notice the gap between growth and value [in 2020]. What you see is a 36.7% return difference between the best-performing style, mid-growth, and the worst performing, mid-value,” he said. “Then, mid-cap value came back in 2021 with a 16% advantage [over] mid-cap growth. And look at 2022, a tough year for everybody. But even then, mid-cap value beat mid-cap growth by about 14%. So diversification is helpful.”

What’s The Right Time To Invest?
Regardless of whether it’s an election year or there’s a new geopolitical crisis or natural disaster to contend with, the best time to invest is when the client has money to invest, McKinney said.

Pre-election years and election years usually see strong performance, and it’s the fault of the 24-hour news cycle that clients become anxious, he said.

“There’s always going to be a different headline,” he said, adding that the 24/7 news cycle makes people emotional, then compels them to jump in and out of the market, which increases volatility.

He listed four historical examples of markets declining sharply in a short period of time: during the oil shock of 1973; the stock market crash of 1987; the dot-com crash of 2000; and the Global Financial Crisis that began in 2007. The months to recovery ranged from 19 to 73, but there was always a full recovery and the market moved to even greater highs afterward.

Looking at the 2008 financial crisis, McKinney said the majority of the trillions of dollars that drained out of the U.S. stock market left in February of that year, just before the markets hit bottom and started their phenomenal recovery. The bottom came on March 6, 2008. The week before that, a trillion dollars had disappeared.

“That money felt the full brunt of the drop on the way down, was pulled, and then wasn’t around for the recovery. A double whammy,” he said. “You’d like to think that people learned their lesson and this wouldn’t be repeated, but it was. In March and April of 2020, when the stock market was falling and we had all the challenges of Covid, you saw it happen again, and many of those people missed that great recovery.

“It’s another reason why financial professionals are so important,” he concluded, “to hold investors’ hands.”

What About Recession Risk?
According to McKinney, the average recession lasts 12 months, and equities don’t always go down. Meanwhile, the average length of a bull market is 56 months, with a return of 137%, and the average length of a bear market is 14 months, with an average return of 28%.

“If your clients have losses, it’s going to tempt them to bail, but if they bail it’s hard to make it back,” he said. “So you know what to do. Continue to do what you’ve been doing for years. Have conversations with your investing clients early and often. And make sure that you talk about the role that emotion, unfortunately, plays in investing.”