We are coming off of some pretty significant moves in the stock market. The market dropped over 35% from its highs in a matter of weeks (quickest drop in history) and then snapped back to recover much of the initial loss. Nine percent daily moves became common for a short while and when we got a four percent move in a day, it was no big deal. Amazing times!
Solid or Lazy Advice?
As a frequent speaker at conferences (webinars today), I speak with a lot of advisors. Many have become coaching clients in The Behavioral Finance Network. No one I spoke with, and I presume most advisors, advised clients to bail. Rather, they counseled clients to stay the course and tied all decision making back to their plan and personal situation.
At the same time, there were very few advisors that took advantage of the drop to buy low. If we are always telling clients we want to buy low and sell high, why didn’t the majority of advisors take advantage of the time to buy low? There is no doubt a 35% drop from the highs qualifies as low to some extent. Who wouldn’t want to buy in there? So why did few do it? There are several potential responses to this question:
- Didn’t think 35% was low enough to buy in
- Didn’t want to buy at 35% down because it might go down 50%
- Has a rebalance plan based on a specified time interval (annual)
- Clients are 100% in stocks. No chance to buy low
- Too lazy. Didn’t want to do the trades or contact the clients
- Caught them by surprise. Had no plan in place to buy low
A Plan to Buy Low
My guess is that most advisors didn’t take advantage of the drop because it happened so quickly. They were busy putting out fires and keeping clients from going to cash. In other words, neither the advisor nor the client was ready for this. We could justify that it was an anomaly, an outlier and therefore wasn’t really our fault. Or we can learn from this and ensure that we have a plan going forward. We talk about clients having a plan for their financial future, in fact we are architects in creating that plan. But do you have a plan to help clients take advantage of volatility to buy low?
A good plan starts with proactive communication. I have always been reminding investors that markets sell off and it will at some point – I am sure you have too. Earlier this year, as Coronavirus talk was taking hold, but before the markets went down, I reiterated it again and specifically told clients Coronavirus is a big unknown, and that if the markets went down more than 20% from the highs, I would consider adding to positions. Then the market sold off over 20% within days; then more. It caught me by surprise, but not too much.
On my whiteboard I had two numbers written down, one represented 35% from the highs and one 45% from the highs. To take the emotion and guess work out, I made it mathematical. If they trigger, each one will cause a 3% – 6% increase in stocks, depending on the client risk tolerance and portfolio. We triggered the first one, but not the second. Every single one of my investment clients added to stocks during the significant fall. None of them were at the “bottom”, but all of those positions are strongly profitable at the time of this writing. And more importantly, I didn’t have a single discussion with a client about selling stocks. It starts with proactive and consistent communication, followed by a plan you execute on.
It’s Not Too Late, Yet
If you talk to clients about buying low, which I believe every advisor does, then you better have a plan to help them buy low. You are their advisor, you are their guide. But if you don’t have a plan to act, you are just as susceptible to emotional decisions as anyone. So long as you can fog a mirror, you are subject to the same behavioral biases as myself and your clients. It’s in our planning, both for the client and our business, that we are able to circumvent the emotional response and do what is right. And what is right isn’t about “nailing the bottom”, it’s about following the plan – whatever plan that may be.
If you need help creating a plan, join The Behavioral Finance Network. That is one of many things I tackle with advisors to help them differentiate themselves and become a superior choice to their competition.