4 Misconceptions about Market Volatility Your Clients Need to Be Aware of
As a financial advisor it’s your responsibility to get your clients to stick to their financial plan for the long term. This means you’ll need to change any pre-conceived notions they may have about market volatility. In particular, you need to get across that volatility does not equate to risk or loss.
Here are some common misconceptions about market volatility your clients may have and how to address them.
Misconception #1: Market volatility is accurately represented in the media. In reality, it’s not.
Everywhere we turn the sky seems to be falling in when it comes to the stock market. The media sells space by implying that disaster is always lurking just beneath the surface, ready to drag down unsuspecting investors. This makes for great attention-grabbing copy but it doesn’t represent the truth.
In fact, the stock market remains one of the most effective places to invest. You need to get across to clients that the Dow is not their enemy but their friend. Be enthusiastic and use your personality to convey your confidence in the market so that clients believe you and not the news.
Remind them that the stock market has always risen despite frequent episodes of turmoil. And while there will always be another war, political unrest, or recession, the Dow has always recovered and reached new highs.
Misconception #2: Cashing in during a downturn is the right thing to do. In reality, it’s not.
Clients may know that, rationally, it’s impossible to time the markets – but emotionally they may feel the urge to cash in when they see their investments dip.
It’s up to you to keep your clients invested when stocks tumble – make them see the bigger picture. Ask your clients why they set up their investment account in the first place. Has anything changed? If nothing’s changed and their reasons for investing remain intact (and there’s still an appropriate time horizon in front of them) explain that there’s little reason to sell. All funds go through periods of poor performance and bounce back over the longer term.
And if the whole market is underperforming, there’s little likelihood that moving into cash will help them recover any losses in the short term.
Misconception #3: It’s productive to keep checking the Dow’s performance daily. In reality, it’s not.
Some clients feel the need to obsessively check their investments several times a week or even daily. You need to tell them that this is counter-productive. Stocks prices go up and down on a regular basis – what clients should be focusing on is the long-term outcome.
Here’s a story to explain why they should refrain from obsessively checking their portfolio value.
After investing $1000 dollars in the stock market a couple set off on a world cruise. There was no internet access and no way to find out how their investment was doing. When they returned from holiday they didn’t know that at some point their investment lost all its value – because it had recovered all its value and more the day before they arrived back.
That couple had no need to worry about their portfolio and investments value – and the same goes for your clients. The market have always returned stronger than ever.
Reassure clients they hired you to do the day-to-day worrying about their investments and that is what you will do. It’s your job to focus on the short term and theirs to focus on the outcome.
Misconception #4: When shares fall in price, they lose value. In reality, they don’t.
Clients often feel that when an investment goes down, the price has dropped and so has its value. You need to educate them that this isn’t the case: A decrease in price does not equate to a fall in value.
To get your point across ask your clients if they like a bargain. We all love a bargain, we snap up things when they go on sale because we see them as a good deal. When an item is marked down we don’t assume its damaged or of a lesser value.
But clients see investments differently, feeling that when investments go down in price they’ve lost out. Tell clients during periods of volatility they should see their investments like a marked down commodity. The lower price shouldn’t skew their perception of the ‘real’ value of the investment.
While you can’t change your clients’ risk tolerance you can change their perceptions by being proactive and positive – and by educating them on the nature of volatility. Use persuasive arguments in order to change their outlook on investing, urging them to focus on the destination rather than the journey.