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There is no precise count of the number of Wall Street strategists who make projections about where the stock market will go in the near term. It seems every day you hear a new name of a conflicting view. Investors who work with a financial advisor look to their advisor for advice. John Naisbett famously said “We are drowning in information but starved for knowledge.” It is fair to say no one can accurately predict the future on a consistent basis. (1) Investors who work with a financial advisor look to their advisor for advice. How might you advise them?
The expression “Expect the unexpected” isn’t very helpful, but it fits, at least in the short term. You can do better than that. It is important to recognize risks and suggest taking advantage of opportunities.
Let us assume a scenario when the stock market is experiencing a bout of stormy weather. Clients are nervous. You have looked back on history to calm them. What else can you do?
1 What do your analysts say about taking the long view? It is very difficult to predict what the stock market will do from one day to the next. This is a game it is very difficult, if not impossible to win. If you are right, the client might look back and determine in hindsight, the outcome was obvious. If you are wrong, they will consider this a failure, casting doubt on future predictions. A better strategy is to think one, two or three years into the future. Where do your analysts think the market and the economy are going? Lean on their research.
2. What have been the recent underlying investment themes of the last few years? You know several off to top of your head. They might include artificial intelligence, health care for an aging population and alternative energy themes like solar power and electric cards. Create your own list. Ask your client to add or subtract from that list. Are these themes going away? Will someone say: “Lets stop working on AI” or “Aging Baby Boomers have more than enough health care options, so that problem is solved.” Probably not. Which themes do you and your client feel are enduring?
3. Can you invest in those themes while reducing the risk of owning individual stocks? Years ago, I remember a presenter mentioning at the dawn of television, there were many companies seeking a foothold in the field of this emerging technology. There were winners whose brands endured and many losers. Continuing with the enduring theme approach, are there “baskets of stocks” you can buy eliminating the need to pick and choose individual companies? Do you and your client prefer a managed or unmanaged vehicle?
4. What are your client’s favorite stocks? Investors can be scared of the stock market and cheerleaders for certain stocks at the same time. Some clients buy and hold certain stocks for decades. Barbarians at the Gate told the story about RJ Reynolds, the famous tobacco company in Winston Salem, NC. The backstory was there was incredible employee loyalty. Employees on their deathbed would tell family members, “Don’t ever sell the stock.” (2) Ever if the stock market is doing badly, some investors will see a buying opportunity. As their advisor, it is important to bring your firm’s research opinion and the risk of a concentrated position into the discussion.
5. Are clients still adding money to the market on regular intervals? They might be scared of the market, yet dollar cost averaging has a lot going for it. If they are reluctant to take money off the sidelines, their 401(k) at work is likely an example of this strategy in action. Are they able to “buy more shares” of the products representing their money in the stock market when prices are down? This can help make the case for dollar cost averaging in their taxable accounts.
6. What is your current asset allocation telling you? Buy low, sell high is good advice. It is common sense. Most investors would agree with it. Rebalancing your investment portfolio on a regular basis makes sense. It is logical that the equity component is overweighted when stock prices are high and underweighted when stock prices are low. Will your client agree to stick with a discipline even if predicting where the stock market will go next is impractical?
7. What do you need to see to feel good times are ahead? You have read literature when people say “Send me a sign.” It has been said no one rings a bell at the top or bottom of a market cycle, but that doesn’t mean you cannot use the “sign” analogy. What does your client need to see to gain confidence good times might be ahead? Is it inflation under a certain number? Interest rates at or below another number? A certain number on the reported unemployment numbers? Get several indicators from your client. How many do you need to see headed in a positive direction? Three out of five? All five? Keep in touch with your clients as you keep track. This could be the sign they are looking for.
The job of the financial advisor can be difficult when so much is beyond your control. You can still provide guidance for your clients.