Many clients want to flee the markets during times of volatility, which can sabotage their investment plans. Understanding your clients’ emotions can help you to persuade them to remain invested for the long term.
“Investors often do not do as well as the markets because they jump in and out of them,” says Elizabeth Hoyle, chief marketing officer with Bridgehouse Asset Managers in Toronto.
Research in the field of behavioral finance indicates that clients typically base their decisions on the avoidance of short-term losses instead of striving for potential long-term gains, Hoyle says.
“Remind your clients that investing is [an activity] in which they can’t slow down for a while and then play catch-up,” Hoyle says. “The less clients tinker with their portfolios, the better off they will be in the long term.”
Successful investing requires a consistent, progressive approach, she adds.
Here are some ways to get your clients to stay invested for the long term:
> Urge clients to avoid checking returns frequently
Most clients are striving to achieve a goal that is 15 or more years away. Therefore, they do not need to check their investment returns every month. Clients are likely to become more emotional about their investments the more frequently they check their returns.
Hoyle recommends clients look at the performance of their investments annually, which corresponds to the typical advisor review period. Clients who check their portfolios annually, she says, are likely to be “most happy.” Clients who check more often — for example, daily —”experience a lot more stress.”
> Help your clients understand risk and volatility
Explain to your clients that risk is the possibility of market loss, while volatility is the degree of fluctuation experienced by a security or the market in general.
“The risk clients should be worried about is that their plan wouldn’t work,” Hoyle says. “That is, they would not achieve the expected results.”
In discussing risk, it is important that you help your clients understand the amount of investment risk they can take. Bear in mind that clients often overestimate their appetite for risk. Risk tolerance represents the degree of change in their investments that they can withstand comfortably during varying market conditions. Their capacity for risk is based on the amount of risk they need to take in order to achieve their goals.
Let your clients know that both their risk tolerance and capacity for risk are taken into consideration when constructing their portfolios.
“They should see volatility as normal, short-term market behavior,” Hoyle says — which they can’t control.
> Clarify your role
Remind your clients that your role is to ensure that their investments perform according to plan, Hoyle says.
Tell them that you will call them if there is a problem, she says, and that you also will meet with them for an “annual check-up.”
Assure them that they should stay the course when investing, and not worry about the short-term performance of their investments.
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