financialplanning
provide greater returns than bonds;
however, we also recognize that
stock returns will be more volatile.
So, by this framing question we’re
demonstrating two things. First, we
are not market timers and if you
are, we may not be the right choice
for you. Naturally, everyone would
like to be in stocks only when the
market is going up. Unfortunately,
consistently achieving this goal is
less likely than finding the pot of
gold at the end of a rainbow.
Second, if you say that you can
stay in the market to receive market returns, we will keep reminding
you, each and every time you get
nervous. We’ll even haul out a copy
of the questionnaire you signed. We
need to know that you will stay on
the roller coaster even if you won’t
be waving your hands in the air.
Another question you might ask
is which of the following would rep-
resent your client’s reaction to an
investment representing a signifi-
cant portion of their stock portfolio
losing 25 percent in one year:
“I would be very upset and sell
all my equities.”
“I wouldn’t be very happy, but
I would probably keep all my equi-
ties.”
“I would think that it is a
peak buying opportunity and buy
more.”
Following up their selections
with a discussion of the likely con-
sequences of each choice may help
your clients explore the possibilities
of lower returns and therefore help
them bring their expectations into
line. (Of course, realistically, we can
only determine how the client will
ultimately react once they’ve had
the experience.)
Finally, stress-test your client’s
portfolios and determine the impact all this volatility may have on
their ability to reach their goals and
objectives. Start by adjusting the returns to a lower expected rate, then
look at the long-term impact.
You may want to discuss future
goals, highlighting the difference
between needs (basic living expenses), wants (goals that could
be accomplished if the economic
climate improves somewhat) and
wishes (goals that can be accomplished if recovery happens quickly
and economic health is sustained
The ride
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for a longer period of time). Knowing what can be accomplished even
during times of extreme volatility is
re-assuring.
After more than 30 years in the
business, I wish I could tell you that
eventually these conversations with
clients won’t be needed. Truth is,
I’m dispensing the same palliative
prescriptions for the same con-
cerns that I’ve always given. That’s
just part of the job. When you have
the flu, you get the same advice
and medicine from your doctor
each time.
