Those odds of failure, however, assume that the client will not make any adjustments—that people will just keep going along as they were in the face of a growling bear—and that’s a dubious way of looking at it. Instead, you should present Monte Carlo results as something offering the odds that clients would do something different from what’s shown.
You can then lead them to the discussion about what makes the most impact on their lives, identifying what these different actions are. This focuses them on what they can and cannot control. Markets are uncontrollable, but clients’ behavior is not. They have choices that can improve outcomes. What are the behaviors that can make them successful?
When portfolios shrink (or don’t grow), clients might choose to work longer, save more or, if already retired, spend a little less. The studies on sustainable portfolio withdrawals show that such adjustments can be powerful. Altering an asset allocation is not likely to be a big help, at least from what I can tell you from the recent study I did with my business partner, Mike Salmon (in the January 2020 Journal of Financial Planning).
The asset allocation alteration that can have a big impact is panicking and selling after a large market decline. Clients can reduce the risk of this behavior by recognizing that one thing they can control is their intake of news. How do they get information and how do they react to it? If they admit that watching cable news gets them wound up, they may choose to get their information elsewhere or work on changing their reaction to what they consume.
Instead of filling them with anxiety over the unpredictability of financial markets, you can talk with them about what they can and should do when the inevitable volatility arises, and that may better prepare them. I heard football coach Lou Holtz once say, “Pressure is what you feel when you are not prepared.” Financial planning is about preparation, not prognostication.
Dan Moisand, CFP, is an independent financial advisor. He practices in Melbourne, Fla. You can reach him at [email protected].