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Calming Your Clients – How to Position Volatile Markets

Calming Your Clients – How to Position Volatile Markets
Source: Stockcharts

These are stressful times. When the markets are strong, advisors can keep their client base on autopilot and can grow at the pace they want. However, at times like these, when markets are incredibly volatile, your client base is stress tested. You won’t get calls from everyone; in fact, the clients that are giving you the hardest time are likely only 10 to 20 percent of your client base. Those 10 to 20 percent are probably taking up 80 percent of your time right now, so we want to put something together to help you with them. The only thing known about stock markets is that eventually, there will be volatility, despite anyone telling you otherwise.

Bear markets, recessions, depressions, these are all inevitabilities that are never fun to go through. Why does this happen? Stock markets generally overshoot to the upside and the downside, and usually, it will take a catalyst for an event to happen. This time, it was the Coronavirus. For this blog, we are not going to concentrate on what has happened in the markets, but rather how to help you guide conversations with your clients. If anything, it should give you some useful phrases or tips on how to position. I will break it down into three parts:

  1. The reality of a bear market – comparing clients returns to overall markets
  2. A review of their risk profile and portfolio risk
  3. How you prepared for this, and a review of their financial plan

The Reality of a Bear Market

The bottom line here is you need to be firm but caring. Your clients are likely to use you as a sounding board because they want someone to blame for a decline in their portfolio. An advisor who went from institutional portfolio management to retail clients once told me something that has stuck with me during my career. If the markets were down 25% and you held some cash in the portfolio and were only down 20%, you would gain praise for beating the market by 500 bps. The most significant difference with retail is that if the markets are down 25% and you lose 10%, you might get fired. That is the reality you are dealing with right now, so it is best to go on offense, and not take it personally.

The first and foremost thing you should do is know the returns of your client’s portfolios, and what the markets have done in the year, month, and days. If you do not hold an all-equity portfolio for clients, which likely is true, you have probably gained some on the fixed income side to offset this pullback. It is time to highlight how much less their portfolio has lost in percentage terms. But do not beat around the bush or try to be sales-y at this point in the game. Give them what they are asking for and tell them that you expected this to happen at some point – because you did. Bull markets do not last forever, but bear markets are shorter, and recoveries can be sharp just like it was in 2009 and 2019.

Risk Tolerance
Review of client risk profile, portfolio risk and comparison to benchmarks

A review of their risk profile and portfolio risk

The next part of the conversation should be led by reminding them of discussions past. A handy graph is the risk profile and benchmarks from our software to help guide you. For this client, for example, their portfolio lies at a PRISM Rating of 7.0, of high risk, and is just below the SPY in terms of overall risk. Clients will try to shift blame because of behavioral biases forcing them to; your job is to educate them properly and hold their hands right now. A risk rating of 7.0 is close to the overall risk of the SPY, which means that this portfolio is likely having a pretty significant pullback. “Yes, John, I am aware of how much the portfolio has lost. When we met last year to discuss how much risk your portfolio has, we discussed it being close to the overall stock market. This time will pass, and it isn’t easy, but if you stick to your plan we developed in the long-run, we will get you to your retirement goal.”

How you prepared for this, and a review of their financial plan

Prism Analysis for Crisis Market Scenarios
StratiFi Portfolio Stress Tests

Now is the time to guide the conversation forward. Tell your clients that these are exceptional circumstances, but the financial plan is what to concentrate on right now. Are they on track? Do they have a shortfall after this? Are they going to be able to retire as expected? As you would have done with our software, it might be useful to bring up that you analyzed their portfolios for extreme tail events, to see what kind of losses would happen in a bear market. Show them what you did. Then concentrate on their goals from their financial plan.

They are likely still on track, given the incredible growth over the last decade in stock markets, so tell them that. You have done your job well by providing them a breakdown of what the possibilities are, and unfortunately, we find ourselves amid a bear market. They haven’t felt this bad in over a decade, but they had exposure during one of the greatest bull market runs in history first. Do they remember what happened from 2007 to 2009? The stock markets lost over half their value. After 2009, though, the markets rallied, and they rallied quickly. Stick to your long-term plan and know that the world isn’t ending tomorrow.

There may be more pain in the short-term, and it looks like the world might enter a technical recession. The bounce-back in activity should make up for it once this virus is contained, and then we can move on to the next wall of worry to get over. We will likely look back on this in 5 to 10 years as one of the most significant opportunities to be invested in our generation. Now is not the time to run, so turn off the TV, don’t read the newspaper, and concentrate on the things that really matter.

Akhil Lodha Author
Co-founder & CEO StratiFi Technologies

Building the industry standard for understanding portfolio risk through cutting- edge technology at Stratifi.

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