Cheryl Sherrard’s clients know what it’s like when the markets turn down. As a senior financial advisor at Clearview Wealth Management in Charlotte, North Carolina, she works with people employed by financial institutions in the area.
Leading up to the 2008 recession, many of these clients had stock in their own company. Sherrard advised them to sell some of the equity to reduce their exposure to their employers’ stock, but some clients’ beliefs in their banks wouldn’t waver. “Some had pages and pages of stock options that they would hold on to just to see if they went up,” she says.
But they didn’t. Bank stocks were some of the hardest hit in the 2008 dip.
Sherrard’s clients fell victim to a common tactic of using past returns to predict the future. But when evaluating a portfolio, it’s an idea that can get in the way of a strong retirement. The clients, in this case, learned the hard way.
[See: 8 Soaring Stocks That Suffered the Big Bounce.]
Part of the financial advisor’s job is to convince investors to abandon losing strategies and to avoid staking a position that leaves them vulnerable to a sudden downturn. And while many have their own tried-and-true strategies, here are three common tactics they may take:
Fight mental accounting with buckets of savings. Investors have a tendency to track their investments in their head. They imagine what will happen if the Dow Jones industrial average jumps 1,000 points, and lose sleep over the opposite.
But they also value some types of money differently, says Todd Moll, chief investment officer at Provenance Wealth Management in Fort Lauderdale, Florida.
For instance, an investor tends to be more conservative with an inheritance gained from the sale of a family business that a client’s parent sweated over for years, Moll says. But if the same money came from the estate of a distant relative, they may be overly aggressive with the money.
“It’s really subject to emotional attachment the client has to the source of the dollars,” says Moll.
When planning for retirement, it’s best to have a strategy that works in lockstep with other parts of your portfolio. Moll separates clients’ savings into short-term, medium-term and long-term needs. Each time horizon has a different level of risk associated with it — the long-term savings has a higher stock exposure (typically) than the short-term money that will be tapped within a few years. This allows the client to invest a sudden windfall however they would like while still working within the framework of the portfolio.
[See: 9 Ways to Harness the Growth of Latin America.]
Avoid getting anchored to a performance number. It’s exciting to see a portfolio jump. “Everybody wants all the upside, but none of the downside,” says Robert Gerstemeier of Gerstemeier Financial Group in Chicago.
This is particularly true when someone decides to change advisors and come to someone new. The urge to make sure the new advisor will produce enough value to show her worth leaves the client looking for outsized returns. But if you start with a new advisor at the end of a market run, you will likely see a fallback in returns in those initial years, while the opposite is true if you begin a new relationship at the beginning of a market run.
That’s why Gerstemeier warns new clients that he’s “neither an idiot nor a genius.”
But savers don’t just do this with new advisors; they also will get seduced by a new portfolio high or reaching a certain benchmark by a certain age. “That becomes their focus,” Moll says.
The effort to reach that number can replace the long-term goals one has for retirement. This behavior, which is common among most of us, requires a constant re-focus on long-term goals. That’s why “when we’re meeting and going over a client’s portfolio, we’re spending a lot of time talking about what the portfolio is designed to do…less so on the fluctuations of the portfolio,” Moll says.
Find ways to put investors in their future self’s shoes. It’s difficult for anyone to picture themselves 20, 30 or 40 years from now. It’s easier to place more importance on today than what may happen in the future. It’s one reason why risk aversion can have a dramatic impact on future savings, since it’s easy to overstate a shortfall in the market.
But advisors try to get their clients to imagine themselves when they’re 70 and ready to take it easy. They ask how their clients imagine retirement. Then they provide strategies for making sure there’s enough money available to reach that expectation. For risk-adverse clients, he then checks to see if they have “the ability to meet the financial goals and objectives with a low-risk portfolio,” Moll says.
If they don’t, then the retirement expectations are revised or the amount of risk a client will take on will change. It’s a back-and-forth discussion, in an effort to put clients in the shoes of their future self.
[See: The 9 Best Investors of All Time.]
It’s a technique that’s difficult to visualize, but one advisors try to provide in order to ensure that investors don’t get in their own way.
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