Bear markets are inevitable. In the 1960s and ‘70s, the Bordeaux wine industry in France used to have great, average and poor years. In the later decades, investment and technology changed how wine is made. The French might explain, “There are no more poor years, only great and average years.” There are still poor years because no one can control the weather. There are still bear markets too.

It is a mixed blessing that many advisors have not seen a really bad market. Consider these two examples: Let us assume an advisor would need to be at least 21 years old to have firsthand experience with the stock market in any given year.

• The Crash of 1987. On Monday, October 19, 1987, the market closed down 22.6%. Hard to believe, the decline was 508 points. A 500-point move wouldn’t get us too upset today, but the DJIA was about 2,286 before the 508 point drop. A person born in 1966 would have been age 21 in 1987. They would be age 57 (or older) today. Any advisor under age 57 probably was too young to be involved.

• The dot.com bubble. According to Wikipedia, between 1995 and March 2000, the NASDAQ rose 800%. By October 2002, it lost 740% of its value. Assuming the “age 21 rule” mentioned earlier, an advisor born in 1979 might have been starting in the business in 2000. Today they would be age 44. Any advisor under age 44 today was probably not in the business in 2000.

These are extreme examples of sudden declines. Bear markets can deliver pain over longer (or shorter) periods. It is easy for clients to lose faith. As a professional working in their best interests, how should you advise them.

Let us first remember two points:

1. You cannot accurately predict the future. We can hope everything will “be all right” but we cannot guarantee it. Your client knows you are not psychic.

2. It’s their money. You cannot forbid them to sell. You cannot ignore their instructions.

Addressing Bear Markets With Clients
We all know bear markets are scary. It’s been said the four most dangerous words on Wall Street are “This time it’s different,” but very often, the times can feel different at that moment.

1. Own good stocks. Even when the market is volatile, there is often a flight to quality. About a quarter of the stocks in the S&P 500 have been in business 100+ years. They have weathered marker cycles before.

2. Be diversified. Some sectors do better than others. It is harder to pick winners if you limit yourself to a few, or even one industry. An individual company can get into trouble. In an industry, there are usually survivors. It is rare they all disappear.

3. Respect asset allocation. It has been said “bonds are boring.” It’s also been said they act as a shock absorber in the diversified portfolio. Assuming the firm kept the asset allocation constant, and the client followed your advice, they would be taking money off the (stock) table as the market rose and adding when the market declines.

4. Eliminate margin debt. Leverage can make sense when the market is going up. All the losses are on your side of the equation when the market is going down. If you were on a sailing ship and got caught in a storm, you would pull down the sails as quickly as possible.

5. Market timing doesn’t work on a consistent basis. You have seen the statistics on what happens when you miss the best days in the market. If not, find your firm’s report. Human nature tells us people don’t want to sell when things are going well, and they don’t want to buy during declines because they think things will get worse.

6. Let the money managers worry about getting in and out. This should be easy because many investors use separately managed accounts or mutual funds. You hired experts, let them do their job.

7. Dollar cost averaging makes sense. It can sound boring, but the logic is you get more shares when buying during a decline, less when prices are high. This discipline helps take out the emotion. Your 401(k) probably works this way.

8. There is often a rally somewhere—part 1 Some people think the stock market ends on our shores. The U.S. stock market does represent 59% of the world stock market capitalization yet that means other countries have large, active stock markets too. An excellent product area manager explained not talking with clients about international investing is like inviting that client to play 18 holes of golf and telling them they couldn’t play past the 11th hole! What does your firm say about overseas investing?

9. There is often a rally somewhere—part 2. The S&P 500 contains 11 sectors. As of 7/10/23, it was up 16.48% YTD. This was not constant across all 11 sectors. The Utility sector was down 5.22% while the Information Technology sector was up 42%. This is important when the market declines because it can give you an idea where the money is going.

10. Get paid while you wait. This is your opportunity to make the case for total return stocks. These are often established companies with long track records.

11. Do you believe in capitalism and free enterprise? Does your client believe the U.S. industry will continue to do well over the long term? Do they believe companies will continue to innovate and invent new things? Do they believe the consumer will continue to spend? These factors make the case for a brighter future down the road. Many people would agree.

12. Always have an outlook. Going back to the sailing ship analogy, as the captain, you need to have a destination in mind. Once we get through the storm, what do we hope to see? Where are we trying to get to? What has to happen to make this successful? What landmarks are we looking for? Share your vision (based on the firm’s research) with your clients.

All these points tend to be common sense. They also show advisors should be in close communication with clients during difficult times.

Bryce Sanders is president of Perceptive Business Solutions Inc. He provides HNW client acquisition training for the financial services industry. His book Captivating the Wealthy Investor is available on Amazon.