MAR. 10, 2020
Countries around the world are assessing the human impact of the current Coronavirus outbreak, as total deaths have now eclipsed 3,000. The vast majority of infections and deaths have occurred in mainland China, but other nations, including our own, are responding to the potential for a wider outbreak with travel restrictions and quarantines of highly impacted areas. Any major news event involving China will likely cause ripple effects around the world, due to the important role the country plays in the global economy. And now that Coronavirus has hit home it’s become even more real to American investors.
Given the ongoing uncertainties surrounding the duration and scope of the outbreak, financial advisors are being called on – literally, in many cases – to answer client questions that sometimes don’t have answers. Yet, advisors have a critical role to play in helping their clients make sound financial and investment decisions. Doing so requires delivering steady encouragement to clients to remain calm, not react to the headlines and stay focused on the long-term.
That is no small task for today’s advisors. Thanks to 24-hour financial news channels, the Internet and mobile devices, there is now a never-ending abundance of news and information with the potential to impact the markets and your clients’ behavior. While you might expect that this river of information would inform better investment decisions, research has shown that it’s often the opposite. During times of heightened uncertainty, emotions can take over and negatively affect our investment decisions. Many advisors may have experienced this in client conversations in the past week.
The best way to prepare for volatility, low interest rates that are challenging investors and the uncertainty we are experiencing now is through portfolio diversification and creating a financial plan that will meet your clients’ financial goals while accounting for the market’s inevitable ups and downs.
But I suspect many advisors find themselves working with people in the midst of this uncertainty who may not have done that preparation, or even if they have, are still tempted to react to the news of the day.
For those advisors, here are a few simple facts to encourage clients to keep in mind as a potential antidote to reflexive shortsightedness.
Bad news often increases investment activity
Media interest in the financial markets rises in times of market stress, with good reason. Their business models are driven by attracting more viewers or subscribers, and for a financial media platform, nothing attracts individual investors more than bad news. In their defense, it’s the media’s job to cover events that move the market. But all of that noise can push your emotional buttons, leading you to make hasty decisions and buy or sell your investments too quickly.
Reacting and trying to time the market takes a toll
Predicting short-term market fluctuations is very difficult, and investors should be cautious about making significant portfolio changes based on short-term market fluctuations. As individual investors react emotionally to news headlines, they tend to buy and sell investments frequently and at inopportune times. All of this movement both in and out of the market means they run the risk of missing many of the best days in the market. And the more good days they miss, the more potential gains they give up.
Staying invested is a key strategy for success
To make the most of market opportunities, it’s best to tune out the daily news and stay invested for your long-term goals. Although there will be down days for the stock market and negative headlines to go along with them, the likelihood of market losses drops dramatically over longer periods.
A balanced portfolio offers significant potential value
If you avoid the temptation to trade in or out of the market and stay invested in a balanced portfolio based on your long-term goals, you’ll be in a better position to reduce the amount of risk you take on – and may potentially increase the returns you realize over time.
History has favored investors who keep their cool at times like this. Since the 2008 financial crisis, we have seen five declines of greater than 10%. It took between 33 and 144 days to reach new highs after these declines.1 In the six months following the Swine Flu outbreak in 2009, global markets rallied by 40%, while there was a 23% rally in the six months after the SARS outbreak in 2003.2
It’s important to remind clients that goals do not change just because the market does and keeping long-term goals in focus during volatile periods can ensure they stay invested in a manner that’s appropriate for their risk tolerance. Investors should maintain their discipline and avoid overreacting to news headlines. With another presidential election on the horizon, the emotional distractions are bound to increase even more. These facts, along with caring encouragement, can help your clients tune out the noise and trust the proven wisdom of focusing on the long-term.