“This time it’s different,” run headlines in newspapers and websites.
“The crash is not a function of the financial system,” the reasoning goes.
“Whole economies have never been shut down before”.
It would be a strange client – or adviser for that matter – who did not, somewhere in the pit of their stomach, question whether or not, this time, it really is different.
The difference between feeling uncomfortable and acting on that discomfort, though, of course is key – and that is where advisers can come in, talking to clients about their perfectly natural fears and concerns and helping ensure they do not act out of impulse today in a way that harms their prospects for tomorrow.
In this column, I will summarise key talking points for advisers when speaking to clients concerned about the market and their portfolio.
At a time when client concerns are likely to be more about their health than their wealth, advisers are of course playing an important role in just listening.
If, however, the conversation turns to investments and the risks in their portfolios that are now showing themselves, I hope the following is helpful.
- Be led by the science
Corrections, crashes and crises happen. While they happen for different reasons and are unsettling, the history and social scientific study of stockmarket cycles tells us to expect a recovery.
It is true that, in living memory, a pandemic is different.
The impact on capital markets of covid-19 is not because of structural weaknesses in the financial system – although some would argue markets are due a correction after the longest sustained rise in stockmarket history – but rather a virulent, sometimes deadly virus.
The initial impact on supply chains from China have now developed into unprecedented global collapses in demand as nations have gone into lockdown.
The social science of economics, though, has studied the rise and falls of stockmarkets for hundreds of years – be it tulip mania (1604), world wars, Spanish flu (1918), the Great Depression, the 1970s oil crisis, 1987’s Black Monday, the dotcom crash and the Great Financial Crisis in 2008/09. The cause of each was different but recovery came as the system recovered and growth restarted.
- Remember the review/planning process
We talked about the fact that events like this can and do happen. The long-term return expectations we used to build your portfolio incorporate the potential for extreme events like this.
Stick with the plan and you are in the best position to achieve your objectives in the long term.
Take your client back to your review or planning process when you matched their risk profile with a suitable portfolio.
The process will have included discussions about the range of returns they might see and that extreme events like this –“one in a hundred-year storm” – can and do happen.
A good globally diversified asset allocation matched to their profile will provide a long-term return expectation that incorporates these events, though – so sticking to the plan will put them in the best position to achieve their objectives over the long term.
- Focus on risk-based benchmarks
You’re invested in a globally diversified, risk-matched portfolio not a single index. Diversification gives you the best chance of mitigating the more extreme losses of individual markets and positioning your portfolio in the right areas for the upswing when it comes.
Risk-based benchmarks are the best comparisons.
The old newspaper adage of “If it bleeds, it leads” is sadly as true of dramatic stockmarket losses as it is of human tragedies.
The news cycle at times like these lead with losses on the FTSE, the Dow, the Hang Seng. The big question for clients, however, is ‘how relevant are these to your portfolio?’
The majority of clients are now in risk-matched, globally diversified portfolios aligned to their risk profile.
The impact on their wealth of the fall in a particular high-profile index is muted by their exposure to a range of other markets and instruments.
Our own experience with the Dynamic Planner MSCI indices, which are based on multi-asset benchmark allocations, is that the length and depth of their drawdown – the peak-to-trough periods – have been shorter and less deep than single market indices over their 15-year history.
Dynamic Planner 5, for example, has had similar returns to the UK market but with lower and shorter drawdown periods. It has also maintained its consistency to the Dynamic Planner risk model throughout and therefore is a more relevant benchmark to review the suitability of a client’s portfolio.
- Stay invested
If you sell out of a portfolio in falling markets and then try and time your re-entry to benefit from recovery, it is almost certain you will miss the most important days when the markets rebound.
The most successful strategy is to stay invested. Think ‘time invested’ not ‘timing of investment’.
For some clients it may well be tempting to exit their investments in an effort to prevent further falls in value and to buy back in as the market rises.
Unfortunately, timing exit and entry into the market is exceptionally difficult, not least because, if they miss a few crucial days trading – let alone weeks – they can miss out on a substantial proportion of the return.
History teaches us clients who stay invested for the duration – even through the turbulent times – do better than those who do not.
Over the 15 years to the end of March this year, £10,000 ($12,265, €11,352) invested in the MSCI Dynamic Planner 5 index would be worth £22,120.
If a client had missed the best 12 months through trying to attempt market timing, however, it would be worth just under £12,000.
‘Time invested’ not ‘timing of investment’ really is the key here.
When risk shows itself in client portfolios – and with the news cycle as it is these days, particularly for lower-risk investors, it would be unnatural for them not to feel concerned – hopefully these four points will prove useful in your conversations.
This article was written for Last Word by Ben Goss, chief executive of Dynamic Planner.
