One commodity that seems to be running a surplus now is anxiety. Everyone is faced with managing emotions, even in the best of times. But when the going gets tough, the emotions tend to go into overdrive. One of the most important roles a financial advisor performs is helping clients deal with market volatility, like that we’ve experienced since the COVID-19 outbreak started penetrating the United States, in a manner that results in the best path forward for that particular client. There is no single best way to approach helping clients through times such as these. But we offer a few thoughts here in the event they may help financial advisors and their clients.
The cause of the market disruptions in the first quarter of 2020 is unique. But the market effects have precedent. The severity of the change in market volatility – which some have taken to call the Coronavirus Contraction – may obscure the fact that these events historically occur. And they eventually pass. While clients are likely troubled watching account values decline, it is a natural part of stock market activity.
This may have been the fastest-ever market correction (defined as a decline of 10 percent or greater from a recent high), but certainly not the first. In fact, this is the 27th market correction since World War II. Past performance can’t predict future market results, but markets have still managed through the process of price corrections. When prices drop, it can be tempting to give in to our emotions and react, but patience and caution may be warranted.
Client anxiety may also be eased by providing context. For example, investment banker Goldman Sachs classified the current situation as being event driven Bear Market, which historically resulted in declines of 29 percent and which did not necessarily lead to a recession. By contrast, a structural Bear Market (like what was experienced in 2008/2009, when the S&P 500 lost around 56.4 percent) lasts an average of 42 months.
This event driven Bear Market is unprecedented in that it was a caused by a viral outbreak which prompted governments to essentially shut down the economy to save lives. So, the way forward is unclear. However, Goldman Sachs research indicated stock losses in previous event driven Bear Markets typically regained their previous levels within 15 months.
Offer Advice on When, and If, to React
Reassurance can be helpful as well. Let clients know you’ll be paying close attention to market developments with their best interests at heart. Remind clients that their investment strategy has been created to reflect their specific time horizon, risk tolerance, and goals. Long-term investing often involves getting through a correction to ride out short-term volatility. Let them know you have done analysis on your investments and will continue looking for red flags and opportunities -- based on data including corporate cash flows, balance sheets, asset turns, and macroeconomic influences.
For clients who have cash flow needs from investment accounts, ask them to reach out to you on the best approach for their situation. It’s generally best to address those independent of what is happening in the markets. On the other hand, if clients don’t anticipate taking withdrawals in the near future, the old saying that ‘this too shall pass’ is applicable.
Offer an Idea to Help Others
Some find success in helping others. Since so many of us are sheltering in place and unable to volunteer, giving financial support to those in difficult situations can make a huge difference during a time of national crisis.
So, with so much need, where should you start? Numerous online resources can guide your giving. For example, CharityNavigator.org provides an overview on various philanthropic organizations, rates them, and makes it simple to donate to your chosen charity.
From the CDC Foundation to the Red Cross and beyond, many organizations could use your support. Keep in mind, the Internal Revenue Service has specific rules and guidelines for charitable contributions, so you should consult with your tax professional before contributing.
Ultimately, what matters is how financial advisors and their clients choose to respond to anxiety. Nearly everyone has likely done a few “double takes” while watching major swings in stock prices and movements in the bond and crude oil markets. There may be more in the future, with effects of the so-called Coronavirus Contraction still in our collective windshields. Offering clients perspective, context, advice, and alternatives will help clients navigate the uncharted water ahead. Encouraging them to reach out to you at anytime as their trusted advisor can only solidify your relationship during that journey.