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When Clients Feel They Missed the Move


When Clients Feel They Missed the Move

Money on the sidelines.  It makes the headlines from time to time.1 The rationale is keeping some money available if the market declines.  The flip side is people who’ve been waiting and waiting for the right moment.  As an advisor, how do you encourage clients and prospects to take action?

The Paradox

Its human nature to believe the stock market can’t go up forever.  “No tree grows to the sky” makes that point.2 Optimists sometimes say “This time it’s different.”  It’s usually not.  On the other hand, clients often believe the market can go down forever, or go low and stay low.  The markets run in cycles, yet human nature makes it impossible to time the market.  This is one of the arguments for leaving day to day investment decisions to professional money managers.

Ten Reasons to Invest

Your prospect or client is sitting on the sidelines.  They want to invest, just not now.  They feel they’ve missed the move.  They are worried about an extended bull market.  They feel the market’s historic high will be on the day they committed their money to the market.

There’s always the possibility they might be right.  This should never be a contest of wills.  However, you can make a well thought out case why investing at least some money now makes sense.

1. Dollar cost averaging.  Will they commit a smaller amount with the intention of adding more on a monthly basis?  If the market continues to rise, they made their earlier investments when prices were lower.  If it declines, they average down their cost basis.

Rationale:  There’s usually a dollar amount where they don’t feel they are taking a significant risk, yet can show meaningful results if the market continues to rise.

2. International investing.  Using 2016 numbers, the US equity markets represented about 36% of world stock market capitalization.3 There are many other markets out there.  They don’t all move together like synchronized swimmers.  A good analogy might be investing is like a eating a meal:  The US equity market might be the meat on the plate, other world markets are like the vegetables and potatoes, an important part of the meal too.

Rationale:  They might feel some other overseas markets have more potential right now.  They make small investments in funds or ETFs.

3. Best stock you ever owned.  Experienced investors often have favorites.  They’ve held them for years and think the management is great.  How are they doing now?  Would they sell it now?  Of course not!  They give plenty of reasons!  How about adding to your position now?

Rationale:  Their experience with the stock has convinced them “It’s a keeper.”  They may be open to buying more.  (But beware of concentrated positions!)

4. Sector rotation.  When the market rises or falls, every stock in the index doesn’t make the same move.  There are leaders and laggards.  The Schwab Sectors Views Report4 shows the S&P 500 Index is up by 3.68% YTD as of 6/5/18.  Meanwhile, the IT sector is up 14.84% and Consumer Staples is down 12.21%.  Each sector is ranked Out-perform, Market-perform or Under-perform.

Rationale:  Leadership changes over time.

Related: You Have Expectations from Your Clients, What Are They?

5. Defensive stocks.  Your client is convinced the market is going down.  When it does, institutions usually don’t sell everything and put the money into a mattress.  They often shift to stocks that historically do better when the economy slows down.  These are defensive, or non-cyclical stocks.  In the past, these sectors included utilities, health care and consumer staples.5 That last category includes food, tobacco and beverages.  They often pay dividends.

Rationale:  They know some purchases get made by consumers regardless of the condition of the economy.

6. Total return stocks.  The above category mentioned dividends.  Clients understand the concept of being paid while you are waiting for the stock to hopefully rise.  Some companies have a history of raising dividends over time.  Some clients like the idea of the power company they pay monthly now sends them a check quarterly.  You want companies with stable, solid dividends.

Rationale:  Clients understand interest rates.  They are collecting something regardless of the movement of the stock. 

7. Beneficiaries of rising interest rates.  Your client is confident interest rates will rise.  It’s easy to see why rising rates are bad.  It costs companies more to borrow money to invest in new projects.  Someone must benefit from rising rates.  Banks and insurance stocks are two examples.6

Rationale:  Margins at banks often improve in a rising rate environment.  Who else benefits?  They want to get onto that train!

8. Who’s the smartest investor?  They have their own ideas.  From time to time, the stocks they are buying or selling make headlines on the financial news.  FYI:  They likely pay dividends too, because smart investors often have long time horizons and want to be paid while they are waiting.

Rationale:  If it’s good enough for a smart investor to buy right now, what’s holding your client back?

9. Alternatives.  You sincerely believe the stock market is the place to be.  Your client doesn’t.  What asset class is giving the stock market serious competition?  Bonds?  Real Estate?  Precious metals?  If none of the alternatives sound that attractive, maybe the stock market is still the asset class of choice.

Rationale:  If the alternatives don’t look that great, maybe taking another look at the market makes sense.

10 The other side of the trade.  If your client is absolutely convinced the market is going down, they have the potential to make money from that outcome.  They can buy puts.  They can short the market.  Are they really that confident?

Rationale:  Clients understand markets are cyclical, but are often very reluctant to pull the trigger.  You can research statistics to show short interest on various stocks.

Clients must be comfortable committing money to the market.  As an advisor, you can help make the case why they should be taking action when emotions might say otherwise.
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