6 Essential Investment Tenets to Instill in Your Clients for 2024
The stock market has taken investors on another wild rollercoaster in recent years. The market recovered from a bear market in 2022, and after a solid up year in 2023, there’s bound to be another one at some point. Going into 2024, the market will keep investors guessing, which is why helping your client maintain a long-term perspective is essential.
We can’t know what stocks will do today, next week, or next month. But we know that, over the long term, stocks will continue their century-long advance. Reacting to short-term swings in the market means moving in and out of the market at the wrong times, locking in permanent losses, and often missing out on the biggest gains in the market.
As the last three market downturns (Spring 2020, Winter 2022, and Summer 2023) have proven, investors who manage to keep calm do better than those who panic with the herd. Studies have shown that investors who have conviction in a solid, long-term investment strategy are more likely to stick with that strategy, while those who don’t – fall victim to costly behavioral mistakes resulting in permanent capital losses.
Going into 2024, your clients should anticipate more market volatility. Here are six critical investment tenets financial advisors must instill in their clients.
#1. Have a plan and a purpose
Investors who have a well-conceived investment plan based on their specific objectives, time horizon, and risk profile have something to focus on rather than the temporary fluctuations of the market. Your clients’ portfolios should be constructed around an asset allocation strategy that reflects their investment profile with consideration for the returns their investments need to generate to meet their objectives.
#2. Stop checking your accounts
Studies have shown that ‘loss aversion’ causes investors to monitor their stock accounts or listen to investment pundits too closely, making them more likely to want to tweak their portfolios when times get rough. One of the more important tenets of investing is to remember that any decline in stock prices, no matter how severe, is only temporary—so why bother checking? A one-day, 1,000-point drop in the market can be horrifying, but it will only be a minor blip in your clients’ investment performance in the long term.
#3. Have faith in the market
The next time your clients despair over a falling stock market, remind them that every bear market has been followed by a more enduring bull market for the last hundred-plus years. On average, bear markets have lasted about 14 months, with an average 27% decline. Bull markets have lasted, on average, about 48 months with an average 147% gain. The real risk to investors is not the next 27% market decline. The real risk is being out of the market during the next 147% gain.
#4. Diversification is key
We can’t know which direction the market will turn at any given time or which investments will outperform at any given time. That’s why diversification is so critical to your client’s investment strategy. Diversifying a portfolio across different assets—i.e., stocks and bonds, large-cap and small-cap stocks, domestic and international stocks, different credit qualities, and durations for bonds—can reduce portfolio volatility while positioning it to capture returns wherever and whenever they occur.
#5. Risk is good for return
Academic studies in the 1980s revealed the critical role risk plays in portfolio construction. Most investors understand the correlation—the higher the risk one assumes, the higher the expected return, and vice versa. So, when applied deliberately to a properly diversified portfolio, risk is what drives returns. You can’t manage investment returns, but you can manage risk, and it is through the management of risk that positive, long-term returns are achieved.
#6. Patience and discipline
The biggest mistake your clients can make is shifting their focus from their long-term objectives to the market’s short-term performance. That typically occurs when the market becomes highly volatile, often leading to costly mistakes such as fleeing the market during a steep decline or buying during the exuberance of a big market rally. The outcome is almost invariably negative.
It can be hard to exercise patience and discipline in the face of extreme market moves, which is why your clients need your help. Investors who are able to insulate themselves from the hyperbolic media and the panicking herd tend to fare better. Historically, the stock market has rewarded patient and disciplined investors who have conviction in their long-term investment strategy.
These tenets form the framework of a solid, long-term investment strategy that can help your clients avoid costly mistakes and stay focused on what they can control in 2024 and beyond. That’s the key to solid long-term investment performance.
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