In strong markets, it’s easy for investors to prioritize returns over risk. When friends and family members talk about amazing returns and genius investment decisions, investors can feel left out, or that they are getting sub-par advice.
But successful investing is not merely about returns: the key is risk-adjusted returns. That’s how pension funds and institutional investors think, and that’s the mindset that can help overcome short-term thinking, and shift the focus back to the big picture. Likewise, advisors need to have a robust risk management process and share it with clients.
Sure, it felt good today but what about tomorrow or a year from now? Reacting to bad news in the media is a dangerous move for investors, but everything they see and hear will urge them to do something – anything! You can stop them. You have the power to remind clients that doing nothing is sometimes the most powerful move.
For times when something must be done – when a client’s life circumstances have changed, for example – a thoughtful approach that is in line with their long-term plan is best.
It’s easy for investors to confuse a good company with a good investment, or a good investment today with a good investment for the future. Even professionals aren’t immune to value traps and poor sell disciplines. Too often, investors fall in love with an investment and cannot let go. Or, even worse, keep adding to a less-than-stellar position.
Sometimes an investment just isn’t going to regain its value in the foreseeable future. You can help clients understand this concept. Sometimes cutting losses may be the best way to avoid a significant and permanent loss of capital.
Interest rates do not move in a bubble. When rates change, there are ripple effects throughout the economy, for example, in home prices and mortgage lending. When interest rates rise, it will be harder for people to get the mortgages they need, and companies tied to mortgages and housing are likely to underperform.
When interest rates change it also affects portfolios. You want to ensure that your clients’ asset allocations are appropriate for tomorrow’s interest rate environment, not yesterday’s. Get ready to explain how interest rate changes could impact their financial plans and goals, and what reallocations will best prepare portfolios for coming conditions.
Investors are feeling more stressed about their investments and overall financial situation. Things may not get better this year as volatility likely ratchets up. You are there to protect, guard and counsel your clients, helping them stay calm and stick to their plan, knowing they have the resources to live well. Clients need to channel Warren Buffett, who stays calm and capitalizes on undervalued opportunities during down markets, not Jim Cramer of “Mad Money” fame.
Avoiding the hot head pitfall requires a rigorous and repeatable process. Stone has a process that has been tested through many market cycles, and we recommend that every advisor have one too. It’s the best way to control your clients’ less rational reactions.
Finding the right way to reframe conversations about performance is difficult but essential. Part of the problem is that investments are compared to their benchmarks when, in fact, client portfolios should be judged on their progress toward meeting specific client goals.
Managing expectations proactively can help head this pitfall off at the pass. If a benchmark, stock or portfolio has been outperforming for a decade, inexperienced investors may very well think that will continue for another decade. They are disappointed when it inevitably underperforms. By talking about previous downturns – ideally with visual examples of how fast things went south and how long they took to recover – you can prepare clients for their reaction if and when it happens to them.
As economies, markets, inflation and interest rates shift, asset allocation must adapt as well. Investors simply cannot buy and hold forever, especially if they are approaching retirement or using their portfolios as a source of income.
For example, in an inflationary environment stocks and highyield bonds are usually the winners. But what if we move to a high inflationary environment? An increased allocation to real estate may be prudent. Conversely, if we move to a deflationary or disinflationary environment, reallocating to larger cash and high-quality bond positions should be on the table.
Investors often overlook tax efficiency. Taxation brings together the art and science of an advisor’s talent set. Knowing which investments to put into registered and nonregistered plans, how to take advantage of spousal benefits, and calculating government benefits and the required income for a healthy retirement are skills that are typically out of reach for clients. Helping clients gain tax efficiency is another factor that’s controllable when market conditions are less so.
Investing takes time. Investing well takes a lot of time and skill. Holistic financial management that helps your clients sleep better at night takes even more time and knowledge. Let your clients know how many hours you and your team put into being their advisor. They will likely be surprised, and grateful.
Advisors have an important role at all times. As uncertainty continues this year, clients will need your guidance. No matter what happens, Stone can provide investment solutions and insight to help you strengthen client relationships and grow your business.