Help clients stomach scary market headlines, or pay the price

Arm investors with information to evaluate analysts and benefit from volatility

Jan 7, 2016 @ 12:47 pm

By Liz Skinner

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It's a challenge to calm investors when headlines like “Chinese stocks halted” and “Stock market turmoil” proliferate in their email inbox before they even get out of bed. Then at breakfast they're hit with “Dow set for triple-digit losses” from their favorite news channel.

Helping clients digest and not overreact to such fear-bait news amid volatile markets, though, is the best way for advisers to protect investors from themselves. Reaching out to them on the scariest days is a good idea, according to experts.

“If you turn on the media today when markets are going nuts, they are reporting on market movements, there's red all over the screen and lots of movement,” said Jay Mooreland, a financial planner and behavioral economist. “The mind's natural reaction when things aren't turning out well is to do something about it.”

Your thoughts on the wild markets

Often investors tune in to an exorbitant amount of financial news because they feel that if they have information about what's going on, they will know what to do about it, he said. But the reality is that focusing on short-term news leads to micromanaging one's investments and ultimately giving in to another natural inclination, to sell low and buy high, said Mr. Mooreland, who writes The Emotional Investor blog.

Teaching clients how to evaluate some of the recommendations they hear on the news is one step advisers can take to help investors make the right decisions and control their reactions.

Better forecasts incorporate multiple disciplines, for example, and consider what else is going on in the world. Also, the talking head should show more care about getting the analysis right “as opposed to being right,” Mr. Mooreland said.

(More: Develop better plans for clients with an eye on behavioral biases, experts say)

Useful forecasts will change as more information comes to light, as opposed to those from people who tend to deflect blame, such as by saying, “My forecast would have been right if investors had acted rationally.”

Clients should avoid trusting predictions that tend to be very confident and precise, because markets are unpredictable in the short term, Mr. Mooreland said.

Some advisers reached out to clients Thursday in hopes of destressing those who may be watching each gyration of the U.S. markets, which fell the first four trading days of 2016.

The advisers at Yeske Buie sent a note to all clients acknowledging the “dramatic headlines” and explaining how the global market volatility was spurred by expectations about the Chinese economy.

The firm's advisers expect China will continue to create uncertainty and noise for world markets, but that eventually both the Chinese economy and Chinese markets will emerge looking more normal and mature.

“The present bad case of nerves rippling through global stock markets will, inevitably, pass,” the firm's client note concluded.

Advisory firm Accredited Investors sent its clients a note Thursday recognizing the volatility of global markets and described investment areas where the firm is looking for value, such as higher-yielding corporate bonds. Its advisers also are using the downturn as an opportunity for tax planning, the note said.

“The best time to prepare clients for volatility is before it happens,” said Ross Levin, founding principal and president of Accredited Investors. “Even so, advisers have to deal with the feelings many people have when they see their portfolios falling.”

Clients who call their advisers during market swings typically want to know if they will have to change their lifestyle as a result. Even in the rare instances when the answer is yes, they usually can accept that “because then they can take action,” he said.

In fact, advisers can help clients fight the natural proclivity to protect themselves in uncertain times by giving them an action to take. That doesn't mean selling shares, but instead planning a way to deal with market declines, Mr. Mooreland said. He suggested having a conversation with clients about investing some assets in certain areas, like an S&P 500 Index fund, each time there is a significant market drop.

(More: Robos will fare well in market volatility with nerves of steel)

“So investors feel like they are doing something; they are planning to take advantage of the volatility,” he said. “Then if the market goes down significantly more, the investor is more likely to be rational because they have a plan.”

On a day when markets are especially volatile, advisers should be reaching out to clients to let them know their financial professional is aware of what's going on and that it's normal market behavior, Mr. Mooreland said.

“If the phone is ringing from a client, it's already too late,” he said. “They are already charged up.”

And should markets calm down next week, that doesn't mean communication should cease.

Mike McGervey, president and founder of McGervey Wealth Management, said the weekly commentary he sends to clients next week will focus on helping them understand what precipitated the recent market volatility.

"We'll let them know we are responding to what markets are telling us, versus speculating on where they'll go," he said.

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