Coaching clients through challenging markets

By Jay Mooreland

The first half of 2022 was one of the most challenging markets investors have ever faced. Equity markets experienced their worst start (January–April) since 1939, and bond markets had their worst start since 1842. The diversified portfolio got nailed from both sides—a double whammy.

For over a decade, investors have lived in an environment of declining interest rates and quantitative easing. Such “easy money” helped fuel a strong bull market in which the S&P 500 Index increased 350% from 2011–21 (dividends reinvested). While we don’t know what the market will do going forward, investors are currently living in a higher interest rate environment with quantitative tightening. In other words, the environment is more challenging today than it has been for over a decade.

Listen and empathize

When clients have concerns, it can be natural for advisors to jump right into problem-solving. But if we are too quick to provide “solutions,” we may fail to demonstrate empathy—which is essential for us to truly connect with our clients.

To empathize effectively, listen first. Don’t demonstrate empathy right away. If we are too quick to empathize, we may come across as insincere. When people are upset, anxious, or fearful, they often just want to be heard. Hear them. Listen carefully, and perhaps repeat a few of their words to demonstrate you are listening and hearing them correctly.

One way to empathize while sharing an investment truth is to state, “Investing is hard.” The reality is that investing has been fairly easy for the past decade. Investors may not have experience—or they may have forgotten—how difficult investing can be during challenging times. This is also a great opportunity to talk about real investment skill: discipline and patience. Times like these are not easy, but that is why they have a plan and a process, and it is why they have YOU. Make sure they know that is one of your core purposes.

Uncertainty and conviction

As investors ask questions about what may happen in the future, many advisors make the fateful mistake of talking about what they think will happen. As soon as you do that, you indirectly signal to the client that you know what will happen and that they pay you for performance. Any talk about the future should review many possible outcomes (so they don’t anchor to one outcome) and be comfortable using the word “uncertainty.”

We are practitioners working in a field with many uncertain outcomes. It is best to embrace it and to identify what we can control and predict, and those things we can’t. Our time and energy (along with our clients’) should focus only on those things that are controllable and predictable. Since economies and markets are unpredictable, it is better to talk about something we do control—the conviction we have in our plan.

We can’t ask investors to demonstrate discipline if they don’t know their plan or don’t have conviction in it. One of the best uses of an advisor’s time during difficult periods is to help clients develop conviction in the plan and the portfolio. Make sure they know what they own, why they own it, and why what happens over the next few months is irrelevant to their long-term plan. In fact, the only relevant issue is how the investor chooses to act today. That could have significant long-term consequences.

Discipline and patience

Once an investor develops conviction in their plan and portfolio, they can begin to exercise discipline. This will be hard, and you should tell them so. Discipline is hard because investors are constantly tempted by investments that are performing better. Another investment is either making more money than your client or losing less money, and the media will let them know!

The media reports on whatever gets your clients to tune in, regardless of how irresponsible their reporting may be. The media’s job isn’t to help your client make good decisions; it is to get them to tune in. And they are very good at it! This is an investment truth your clients should know; it may help them exercise discipline in sticking to the plan.

Patience is required because markets can be bad for a long time. Anyone can have discipline for a while. But for years? That is hard. Investors haven’t been tested in this way in over a decade, and newer investors have never been tested. If we have a long bear market, investors will need to exercise superhuman patience. But that is what separates the skillful investor from the “average.” Investing is not a sprint, it’s a marathon. It’s time to prepare your clients.

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Jay Mooreland will speak on “Messaging Before, During, & After a Crisis” on Oct. 22 at the NAPFA Fall Conference in Denver

 

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Jay Mooreland founded The Behavioral Finance Network, which helps advisors apply behavioral finance principles to their practice and coach their clients to make better investment decisions.

image credit: istock.com/Pekic