It was a good year for the stock market. In 2023, the DJIA returned 13.70%. Not to be outdone, the S&P 500 returned 24.2%. Great as these numbers are, the NASDAQ Composite did even better, returning 43%. Conversations with clients during annual portfolio reviews should be pleasant during January. Some investors work with advisors. Others do not. What lessons have your clients learned?
1. Markets are cyclical. We know about bull markets and beat markets. Interest rates move in cycles too. Inflation was going up, up and up a year or two ago. Then inflation started coming down. Interest rates were going up, up and up. Then they stopped going up. When something starts going up, that doesn’t mean it will go up forever.
2. The Fed seems to know what it is doing. When inflation suddenly became a problem, some people debated if the Federal Reserve had acted fast enough. Shouldn’t it have done something earlier? The Fed needed to balance colling inflation by raising rates vs. raising rates too high and giving the stock market problems. Once there were fears of a serious recession. People hoped for a soft landing. If the stock market is a forward-looking indicator, it appears the Fed took the right course of action.
3. Holding your winners makes sense. Technology stocks did very well in 2023. That’s the primary reason the NASDAQ composite delivered great returns. Some investors are day traders and might have been tempted to take quick profits. A good advisor recommends holding onto stocks that are doing well, when consistent with their firm’s research department outlook.
4. Handholding has value. In August, September and October, the DJIA recorded three consecutive losses. Some investors might think “the party is over” and it is time to move their money elsewhere. Assuming the client has a long-term time horizon, no immediate need for the money and owns quality stocks, a good advisor tells clients to sit tight and add money if possible.
5. The S&P 500 Index is actually 11 different indexes. Some investors might look at the S&P 500’s return of 24.2% and wonder why they didn’t get the NASDAQ Composite’s return of 43% instead. Yes, that sounds greedy—24.2% is pretty good. Advisors point out the S&P 500 has 11 sectors under the hood, each an index itself. That 24.2% return was boosted by the 56.4% return delivered by the information technology sector, yet constrained by the 10.4% loss sustained by the Utility sector. In 2022, information technology was down 28.2% and the Utility sector was up 1.6%.
6. Sitting on the sidelines makes little sense when you have a long-term time horizon. Some investors prefer to stay in cash. This is a wise strategy if the money is needed for tuition payments or the down payment on a house. No one wants to hear “This is not a good time to sell” when trying to raise cash in the stock market. According to Forbes, in January 2022, a one-year certificate of deposit yielded 0.13%. In December 2023, the date was 1.86%. If a young investor does not need the money until they retire in the distant future, 2023 was not the year to be keeping it in short term time deposits.
7. Owning good companies generally works out in the long run. U.S. companies are good at adapting to changing market conditions. When the Federal Reserve raises interest rates, their objective is to slow the economy. This can hit the housing market hard because higher interest rates mean fewer people qualify for large mortgages. They tend to cut back on their spending. Big companies are experts on cutting back on their spending too. They want to keep their quarterly earnings as high as possible. Thirty-two companies on the NYSE have been around for 100+ years. This means they have adapted to previous economic cycles for a long time.
8. TV ads are good at getting your attention, less so at giving accurate information. We are not talking about financial news or analysts on TV. These are ads selling products. You see plenty talking about rampant inflation, food prices going up or the cost of car repairs. These can get clients upset if they take them as absolute truth. A good advisor put inflation into perspective with actual numbers.
9. World events and the financial markets are not always connected. There has been plenty of tragedies around the world in 2023. We do not need to go into specifics. Some people think these events should tank the stock market. It has been said “The market climbs a wall of worry.” Sometimes certain sectors benefit in unexpected ways. It is important for investors to realize the stock market is considered a forward-looking indicator, not simply reflecting what is going on at this moment, scary though it might be.
10. Rebalancing makes sense. When the stock market hits historic highs, it can seem the right place to be. There is an old saying: “No tree grows to the sky.” Put another way, markets are cyclical. The herd mentality might be saying: “Everything is good, what can possibly go wrong.” A good advisor suggests to clients they take money out of the equity sector, which is now overweighted in their portfolio and move it elsewhere.
The volatility during 2023 and world events have provided an opportunity to demonstrate the value advisors bring to the client relationship. There needs to be an open and frequent channel of communication.
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.