Have Clients Forgotten “Buy Low, Sell High”

You know plenty of stock market sayings.  My favorite is “The stock market goes up like an escalator and down like an elevator.”  Who can forget Will Roger’s observation: “Don’t gamble.  Take all your savings and buy some good stock and hold it till it goes up, then sell it.  If it don’t go up,  don’t buy it.”  Many clients might need a reminder the stock market often moves in cycles.

Four Discussions to Have with Clients

Telling a client to lighten up when the stock market is rising will probably be news they don’t want to hear.  Regardless if they act or not, they should remember the conversation.

  1. Rebalancing asset allocation.  Thanks to a strong stock market, the portfolio of your “growth and income” investor might now resemble the “aggressive growth” investor.  That’s not what they signed on for when the became a client and the risk assessment was done.  Make the case to bring their asset allocation back into line with the model.
  2. Buying out of favor stocks.  If the market is cyclical, it means some stocks cycle in and out of favor.  For purposes of an example, the “Dogs of the Dow” strategy recommends buying the ten highest dividend yielding stocks in the DJIA, revisiting the list after a year. Since these stocks pay dividends, the investor is buying total return stocks.  The logic is if a stock maintains it’s dividend and recovers within the year, it’s not on the list for the upcoming year and would be sold.  Although I’m not recommending any specific strategy, clients should look at quality stocks that are out of favor.
  3. Concentrated positions.  Sometimes a stock that does well can become a major holding, adding another degree of risk for the client.  As their advisor, you should point this out, especially if the stock is hitting new highs.
  4. Stop and limit orders.  Clients don’t always need to immediately sell. As their advisor you can discuss strategies where they place an order that doesn’t become active until the stock price reaches a specific threshold.  This is good for client who feel they want to hold the stock while it continues to rise.  However, no strategy is foolproof.  Gapped openings can see the stock open below the specified level.
  5. Price targets.  Listen to your research department.  They often set price targets.  They periodically revise them.  Keep your client current on the research.  Some clients choose a firm because of the quality of their research,

One of the ways you show your value to your client is utilizing the “acting, not reacting” approach.  You and your client should have eyes on the long term, not just the anticipated opening numbers on the financial news channels in the early morning.

Related: 8 Red Flags That Come Up During Portfolio Reviews