It’s a conversation no one—client or advisor—wants to have. Any financial advisor who’s been through a bear market knows that just the mention of the word “downturn” can put fear into the heart of investors. However, this is one topic that advisors committed to their clients’ best interests need to broach—and they need to do so before the next significant and sustained market drop.
Clients know in an abstract sense that the market cannot continue to go up forever. But when it comes to one’s financial future, there’s a huge gulf between knowing the facts and actually experiencing the reality of a bear market. Even clients who have been through multiple market drops will still have that instinct to pull their money out of the market or make other drastic decisions, potentially impairing their financial futures in the process.
Time in the market, not market timing, is the best way to capitalize on stock market gains.
That’s why it’s so important for financial advisors and their clients to agree on a plan now and set realistic expectations for when a bear market arises. The most important question an advisor can ask a client when discussing risk tolerance is “How much can you lose before you fire your advisor?” That single question could be the main driver of their asset allocation framework.
With that in mind, here are 4 concepts to consider that will put you and your clients in the best possible position for the next bear market...
1. Keep Things In Perspective—Bull Or Bear, No Market Lasts Forever
As the longest recorded bull market run in history continues on – albeit with several constructive corrections – your clients may be asking you how long it will last. The question is a reasonable one, but the answer is complicated. After all, even advisors can’t be expected to know ahead of time when the market will shift from bullish to bearish, and vice-versa. What we do know is that eventually this market will run out of steam. When that happens, remember bear markets also have an end.
Watching investment portfolio values climb has been fairly enjoyable in recent years. However, by most historical standards, we’re probably more than overdue for some sort of market correction, although recession risk remains low.
Remind clients that markets tend to do better over the longer term when they experience occasional “healthy” corrections to reset market valuations. When stocks go parabolic without regard to company fundamentals, we enter bubble territory, and that never ends well.