Client Relationship & Service
Equities entered 2020 with robust growth, coming on the heels of a decade-plus-long bull run. Even as volatility arises from geopolitical and trade tensions and election-year uncertainties, economic fundamentals seem sound enough to support the continuing rally. Still, market analysts and investment banks have recently pointed to signs of bloated U.S. equity prices.
Given the record-long growth in equities, such a stock price correction could shock investors, causing some to panic and make rash decisions. After all, many younger investors have only experienced the joy of a bull market.
Other, more seasoned, investors remember the pain of 2008–09 only too well. “They say, ‘that was tough, but back then I was 10 years younger. I’m 71 now and don’t have that same amount of time,’” Suresh Raghavan, a principal at MBR Financial in Houston, recalls a client telling him.
Today’s volatility provides a good backdrop for RIAs to touch base with them and work through scenarios should there be a sustained drop in stock values. Inflection points in the stock market put RIAs in positions to act as emotional circuit breakers that can temper their clients’ instincts to flee in the face of an increasingly red ticker tape. “Some of this is psychology,” he says. “Individuals deal with money very viscerally.”
Don’t wait until an economic crisis, Raghavan says. Talking through these scenarios while they are still hypothetical helps to keep emotion out of it.
RIAs at MBR Financial conduct an extensive vetting process with new clients that serves as a baseline for each investor. “What are their needs? What are they looking for? What are their hot buttons?” he asks them. “If the market were to decline by 30%, how would that affect your lifestyle?”
Next, acknowledge that the journey will be bumpy. After all, none of us would get on a rollercoaster and be surprised to find the ride alternating between highs and lows. “I’ve been doing this for 30 years; we know there are cycles,” Raghavan says. “They do happen, and we know we can’t predict them.”
The key is to put current activity into the context of the bigger picture and to acknowledge that biases can affect investor thinking. These factors may lead investors to believe that markets are doing worse or better than objective analysis would reveal:
Even if market fundamentals are good, a string of bad trading days could seem more important than they are. Counter these emotions with facts: While corrections are inevitable, bear markets (an extended decline of 20% or more) have happened only once every seven years, according to Standard & Poor’s Composite Index data from 1949 to 2018.
At MBR Financial, Raghavan works with clients to create an estimate of monthly living expenses and then puts enough away in cash or cash equivalents to cover 18 months’ worth of those bills. Even if the client doesn’t have to dip into these funds, just knowing they’re there can help calm frazzled nerves. “My partners wish I wouldn’t call it this, but I call it the ‘blankie’ portfolio: It’s to help you sleep well at night,” Raghavan says.
In addition to socking away readily available funds, Raghavan says he nudges clients to think past the current market gyrations. While equities had another record year in 2019, he says he’s still advocating a conservative shift for some clients’ “blankie” portfolios, depending on their priorities.
When stock markets posted their worst yearly performance in a decade at the end of 2018, Raghavan says one of his clients came to him in a panic. “He had retired, sold his business, and he had about $8 million–$10 million with us,” he recalls. “We sat down with him and said, ‘Here’s what your numbers look like.’”
What the client saw as alarming external market performance was mitigated by the reality of his own financial position and estate plan, Raghavan says. The preplanning helped soothe the client’s worries and gave him the confidence to leave his investments as they were.
RIAs are armed with data: on the economy, the markets’ historical performance, and how individual stocks or funds have performed over time, among others. These are essentially the tools that RIAs, as fiduciary sherpas, can use to guide their clients along the path to reaching their investment goals.
But emotion is often what moves clients to action, and RIAs must be able to respond to that with more than just data. Sure, acknowledge their fear, Raghavan says, but remind clients that there are “always going to be things we don’t know, things we can’t predict.”
Generally, though, Raghavan says he’s able to rely on his three decades of experience to help reassure jittery clients. “When you’re flying in a plane and there’s turbulence, what should you do?” Raghavan asks. “Put your seatbelt on, cinch it up and make sure there are no loose objects.”
The last thing passengers should do is to try to fly the plane themselves, he adds. “Clearly, you want to make sure the plan is appropriate for the situation,” he says. “But allow the professional to do what the professional does best.”
Still, Raghavan says he remembers one particular client who called him in February 2009. “This was right before the bottom and he said, ‘Get me out. This is too much,’” he recalled.
This client was a financial services executive and familiar with market cycles. He wanted to liquidate his holdings into cash anyway. “He was somebody who knew math; he knew the markets,” Raghavan says. “But he said, ‘I can’t take it anymore.’”
Raghavan says he advised the client against such a drastic action, but ultimately followed his wishes: “When you sell and go to cash, you’ve got to get two things right: Make sure the sell decision is correct, but also, when do you get back in?”
The executive eventually got back into the market — though he still has more than $1 million in cash sitting on the sidelines, above and beyond the 12 months of typical spending placed in cash equivalents. “Given the cumulative moves in his other portfolios since 2015, he is fully aware of the opportunity cost of keeping [that much money] in cash,” he says. “It helps him sleep better at night, and if that’s what it takes we are fine with that.”
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