This year is shaping up to be a year of extreme volatility.
Volatility is frightening, to be sure. But we must not let our clients confuse volatility with risk. Risk is the possibility of permanent loss. Volatility is a concern. If we don’t liquidate our portfolios, we are not going to lose money. We should be concerned, of course, but we don’t want to panic and make emotional decisions.
This would be a good time to remind your clients that volatility works to the advantage of long-term investors. Volatility drives stock prices. If we take advantage of volatility, rather than run from it, we can add to our long-term positions at favorable prices.
The best friend any investor has is time. When we have a long-term time horizon, we don’t need to get emotional about short-term volatility. The longer the time horizon, the more the volatility flattens out. Staying the course, versus jumping in and out of the market, has an added bonus. It reduces the risk of missing out on any possible big gains.
The United States had a long track record of investing. The New York Stock Exchange was founded on May 17, 1792. The DJIA was founded on May 26, 1896. The S&P 500 was introduced in 1923 and NASDAQ was founded on February 4, 1971. Volatility has been a constant throughout.
Remind your clients of that track record and ask them three questions.
1. Every single time the markets have gone down, they have come back. True or false?
2. Every single time the markets have gone down and come back, they have eventually gone on to set new highs? True or false?
3. If everyone knows the markets are going to go down, come back and eventually go on to set new highs, why do so many people lose money in the stock market?
The answer, of course, is that fear is a bigger emotion than greed. Investing successfully is counterintuitive. That’s why it pays to have a competent financial advisor on every investor’s team.
To paraphrase Warren Buffett, we’ve got to be fearful when other folks get greedy and we’ve got to be greedy when other folks get fearful. Warren Buffett also said that successful investors don't focus on being with or against the crowd. In good times and bad, they stay focused on their goals. They rarely change their long-term investing strategy no matter what the market does.
And, finally, remind your clients that you are a team and, as a team, you will weather any storm by sitting tight and avoiding rash reactions. You will have a long-term time horizon; you will make sure you have the right mix of assets for their goals and you will not try to time the market.
Get this message out quickly. When things get crazy, and they will get crazy, you want to make sure your clients are absolutely certain that doing business with you is the right thing to do.