How to prepare clients for a wild stock market ride

Few clients want to talk about a downturn in the stock market, and too many would rather believe that the good times are here to stay. That happened during the late 1990s, when stock value was king and the old laws of economics and earnings did not matter. All a company needed was a good idea. The dot-com crash proved that economic theory was wrong. Stock market pullbacks eventually will happen, so how can you prepare your clients?

You have heard the expression “closing the barn door after the horse got out.” As an advisor, you want to act, not react. Stay in touch with clients and be proactive. You don’t want to call a client just to say, “We need to look at damage control.” Being proactive starts with regular reviews.

1. Conduct regular reviews. You cannot assume your client pays attention to their investments. Imagine a client bought a stock at $10 a share that climbed to $100 and dropped back to $10. The client made money on paper for a while, but their position returned to where they started. Do not assume the client is watching their investments. Someone needs to take charge. Focus your client’s attention with periodic reviews. Update them with news that might affect their stocks’ performance. They will perceive you as adding value. If you focus their attention and their portfolio does well, they will likely send you more money to invest.

2. It’s your fault, even when it is not. Reviewing the portfolio together is great when the holdings are performing well. Regular reviews get the client accustomed to this routine. Unfortunately, when something goes wrong, people look for someone to blame, and when clients lose money, they assume in hindsight that you should have done something. Portfolio reviews and regular contact establish that there are two of you sitting on the same side of the table. When you and the client are scrutinizing a mutual fund’s performance, both of you are vetting the fund manager together and deciding whether to stay or consider other managers. You are in a collaborative, not an adversarial, role.

3. Look to the past. We know past performance is no guarantee of future results. That truism is often associated with mutual funds, and you learned that when you studied for your licensing exams. You also probably heard the expressions “History repeats itself” and “Those who cannot remember the past are condemned to repeat it.” If you and a client have been together for years, look at other downturns and how your client fared. What lessons did you learn then, and what do you wish you did differently?

4. Put performance into perspective. Clients tend to measure losses from the high-water mark. If the client bought a stock at $10 a share that increased to $100 a share and then declined to $50 a share, they might measure what they lost from $100 a share even though they’re still making money compared with the $10-a-share cost basis. The advisor needs to provide reality checks for the client. Using a passenger ship analogy, they are on a voyage with their financial portfolio. They have a financial goal on the horizon, just as they have a destination to sail to as a passenger on a ship. The important goal is that the stock will be worth more in the distant future, not just during part of the journey. If it started at $10 and is now $50, it is headed in the right direction. Continue trusting that company management knows what they are doing until your equity research department tells you otherwise.

5. Rebalance asset allocation regularly. Everyone knows you are supposed to “buy low and sell high,” but few people do. They buy high because the crowd is buying, and the news is good. They sell low because something happened in the world. They get scared and sell because they think, This time is different. An advisor can address this problem through rebalancing. When the stock market goes up, the equity portion of their asset allocation appreciates. To bring their portfolio back into balance, money needs to come out of stocks and reallocated to bonds and cash. Now they are selling high.

6. Where should the money go? When the stock market declines, a simple explanation is there are more sellers than buyers. Where are the sellers putting their money? It is easy to think of the S&P 500 as a basket of 500 stocks. It is a basket of 11 smaller baskets called sectors, each aligned with different industries, and each basket delivers a different return. If the overall index is down 15% and one or two sectors are only down 1% or up slightly, this could indicate who the next market leaders might be. Based on advice from their home office analyst, an advisor might recommend the client put fresh money into stocks within these up-and-coming sectors.

7. Total return stocks. Your client believes long-term stock investments will outperform shorter-term trades. If they think a market that is currently flat or slumping will not move upward any time soon, they might be an ideal candidate for total return stocks. These are shares in established companies that have a history of paying dividends that may have increased over time. Your client can buy these quality companies and get paid to wait for the market to bounce back.

8. Make buying low look attractive. Years ago, it was said through surveys that the public had a low opinion of their national congress or parliament but a high opinion of their local representative. This sentiment also exists with investors who are bearish about the stock market overall, but really like certain stocks in their portfolio. Get them talking about their favorite stocks. Would this be a good time to add more shares?

9. Is a guarantee of principal possible? The other side of your business is insurance. Words like “protection” and “peace of mind” are associated with insurance products. Can your client move money out of the stock market and into an insurance product that delivers both principal protection and participation when the stock market does well?

Everyone likes when the stock market soars, but it doesn’t travel in a straight line. It can rise gradually like an escalator and descend quickly like an elevator. Keep in touch with clients, listen to their concerns and be proactive. These actions will help your clients get through those down stock markets.

Bryce Sanders is president of Perceptive Business Solutions Inc. He provides HNW client acquisition training for the financial services profession. His book, “Captivating the Wealthy Investor,” is available on Amazon. Contact him at brycesanders@msn.com.