Experienced advisors know Wall Street has lots of proverbs and sayings. Although some might sound too basic, like “Buy low, sell high” there are others that can help teach investment lessons you would like clients to learn. Yes, it’s better to have an educational discussion complete with Powerpoint slides, but sometimes a “one liner” can get an “Aha! I get it” from your client.
You’ve heard “The trend is your friend.” Another is “A rising tide lifts all boats.” Stepping away from investing, there’s “You can’t fight city hall.” Let’s not forget “Can’t see the forest for the trees.” The implied message is to look at the bigger picture. Understand it. In the investing world, this means figure out where the money is going and how to take advantage of the situation.
- Low interest rate environment. Many client’s see low interest rates as a problem. They can’t get decent rates of interest on their savings. A bond ladder might make sense. Look at the bigger picture. How do businesses expand? They often look at a new venture, estimate the return they might get on their investment and compare it to the cost of borrowing money to fund the project. If interest rates are low, growth companies have an incentive to do what they do best and take on more projects. Consumers might buy cars. Haven’t you seen lots of shiny new cards on the road? New construction in your neighborhood?
- Direction of the market. Your client likely thinks the market will either go up or down. Your firm has opinions too. There are strategies for either direction. Suppose they think the market will go down. Contrarian mutual funds might be described as ones that think the market will move in the other direction. Clients can use short selling and puts to invest under the assumption stocks will decline. They are taking on more risk, of course. Do they know about these other strategies or do they think waiting on the sidelines is the only alternative?
- Sector rotation. If the S&P 500 index is up 1.56% YTD (9/18/20) that doesn’t mean all 11 sectors delivered the same performance. When Information Technology was up 22+% the Energy sector was down 46+% and Financials sector down 22+%. Money is like water. It sloshes around. It often moves from sectors perceived as overvalued to ones thought undervalued. You and your client should study what’s weakening and gaining over time.
- Government spending. During the Great Recession we had the Stimulus Bill. Lots of money went into infrastructure, education, health care and energy. When the government splashes around the cash, private industry knows how to line up and catch it. Your firm has likely determined which industries are beneficiaries of federal spending. Put another way, some industries have been described as more recession proof, because they aren’t tied to consumer spending.
- Real estate. The stock market allows investors to indirectly invest in the real estate market. Who might be the beneficiaries of low interest rates? Homebuyers. They get mortgages. What id the economy sours and people lose their jobs? They are renting instead of buying. Companies owning or managing apartment buildings might benefit. Low interest rates means it’s cheaper to finance construction projects. Unlike actual real estate, stocks have excellent liquidity and the borrowing capability.
- Tax incentives. What’s the trend? When a new tax code comes out, ask yourself: “What does the government want people to do?” Many years ago, they gave some tax breaks to a certain amount of dividend income. This got the public into utilities and other dividend paying stocks. Other times they might have made it easy for businesses to replace their fleets of trucks. Figure out how the government is trying to drive behavior.
- Consumer spending. It’s historically been the big component in GDP. Suppose your client thinks the trend is towards a recession. Certain industries do well because they supply necessities. During the Great Recession I heard it said people were only spending on “Food, Fuel and Pharmaceuticals.” If your client thinks that’s the trend, which industries would benefit? It keeps them invested to some degree.
- Demographics of the population. It’s one of the biggest trends. You’ve heard the stories about the Baby Boom following World War II. Lots of people had children. This meant lots of baby food and baby clothes. Later in life they graduated from school, got jobs and bought houses. Lots of new housing construction and cars sold. Where are the bulges in the demographic curve now? What buying trends does this imply?
- Where do institutions put their money? Insurance companies, foundations and pension funds don’t jump in and out of the market. (I hope not!) They invest with long time horizons, realizing the stock market and economy are cyclical. They are conscious of trends. How do they invest their money? They might be believers in total return stocks, so they get paid while they are waiting.
- Dollar strength or weakness. The USD has been the considered the world’s reserve currency. Other countries buy our government bonds. Money ebbs and flows like water. If US interest rates are low, money might leave the US and head to a stable country with higher rates. Those sellers are getting out of dollars in the process. If your client thinks the trend is for a weak dollar, think about companies that are global in scope, earning their profits in many different countries. As a textbook example, if a company earned one GBP in Britain and the exchange rates is 1.50 USD to 1.00 GBP, they have brought $1.50 in earnings back to the US. If the GBP is $ 2.00, and the company earned the same one GBP, they are bringing home $ 2.00 in earnings. Which companies might benefit from the trend your client sees?
Try getting your client to think about trends longer term, rather than wondering what the stock market will do tomorrow.
Related: What Are Clients Worried About?