How crazy is it that the market indices reached new highs last week at the very time our Capitol building was breached by rioters?
We are indeed living in a curious time in our nation’s history.
While I am in no way a market forecaster, there is far too much uncertainty in the weeks and months ahead to believe we’re going to have a breakout of stability in our markets.
What could go wrong? Here are some questions that don’t have clear answers:
- When will the COVID vaccines roll out in sufficient quantities that the majority of our people are protected?
- Will another new strain develop that is resistant to existing vaccines?
- How many small businesses will survive until the worst of this is over?
- And for the ones that don’t, what will that do to our employment rates?
- What tax changes will we see in 2021?
- What changes can we expect in business regulations?
- What will our “new normal” look like?
That said, it may be a very good time to revisit risk with your clients.
A major responsibility we have as financial advisors is to make sure our clients are well prepared for whatever may lie ahead. And that means not only their financial plans and investment portfolios, but also sufficient psychological preparation to help keep them from falling victim to bad decision-making when volatility occurs.
Several years ago, we published a script that you could adapt for use with clients, and now might be a good time to revisit it.
To help your clients be better prepared for the next market pullback, you might consider a conversation like this:
“[Client’s name], we’re investing [xx%] of your assets in a diversified portfolio of stocks. We’re doing that because, in order to meet your retirement goals, we need to achieve a level of growth beyond what is possible in risk-free investments like cash or CDs.” (You could get into a discussion of all the various forms of risk other than loss of principal, but I won’t do that here.)
“In order to minimize our risk, we’re going to….” (Here you can talk about your risk-mitigation strategies, such as broad diversification, investing globally, etc.)
“But it’s important to understand that in the short run, we can’t eliminate risk. So that’s why we….” (Here you can talk about the funds you are leaving in cash for short-term needs.)
“Sooner or later, and I don’t know when that will be, we will have a downturn in the market.
“So, I want you to remember that we had this conversation, and I told you that this would happen at some point. I am telling you this so you will remember our conversation and so you will remember why we included stock investments in your portfolio – for long-term growth that we cannot get from risk-free investments – and that we took all of this into consideration when we put your portfolio together.
“When that happens, it’s fine if you call me. And if you call me, I will remind you of this conversation. But maybe you will remember it on your own, and go about your business, confident in the knowledge that you have a plan, and your plan took all of this into account.”