Top 10 ways to dissuade clients and prospects away from a recovering market
By Dave Scranton
Financial advisors who specialize in non-stock market investment options already know an up market can be your worst enemy, especially when it stretches on for any length of time. This article everages more recent headlines, trends and figures to instill urgency and convince prospects and existing clients that conservative, income-generating investments are still the way to go.
Financial advisors who specialize in non-stock market investment options already know an up market can be your worst enemy, especially when it stretches on for any length of time.
When I faced this challenge several years ago, I came up with a list of talking points for swaying clients and prospects away from the market despite its apparent “recovery.” Though some things have changed since then, this much hasn’t: Our current secular bear market still has a long way to go before true recovery occurs.
That being the case, I recently updated my list of “Top 10 ways to instill urgency in a recovering market” for the advisors I coach. This new version leverages more recent headlines, trends and figures to instill that urgency, and convince prospects and existing clients that conservative, income-generating investments are still the way to go.
1. Drive a wedge between yourself and other advisors – In a sense, you’re going to drive a wedge between your philosophy and the way other advisors and your client thinks. Most prospects and their advisors got serious about investing in the 80s and 90s during the best bull market ever. They were taught to hold on; the market will always come back.
The problem is, we have 200 years of evidence saying that this secular bear cycle should last 20 years or more, during which time the market should deliver a net return of zero. So you’re wedging in order to expose and break their advisor’s (and their own) addiction to the market at a time like this.
2. Use the fact that people love to look in the rearview mirror and extrapolate – In 1999 and 2007, people thought the markets were going to keep going to the moon. Then, during 2008, when the market plunged, everyone thought it was going to keep going down until it hit zero.
People like to take recent history and project it into the future. By letting your clients know this, your intention is to get them to question why they think the market will continue to climb.
3. If they’re going to look in the rearview mirror, make sure it’s the right mirror – Remind your prospect of how he felt at the start of 2009 when things looked terrible and he was probably vowing to sell everything as soon as the market got back close to 10,000 or 12,000.
Now that it’s there, most people don’t want to sell because they think the rally will just keep going. Make your prospect look in the rearview mirror and remember what they said in early 2009 —and why they said it. 4. Waves of capitulation – Remind clients that within every long-term secular market cycle, there are short-term cyclical cycles, or compression rallies, where the market appears to be rebounding for good. Inevitably, these rallies give way to successively larger drops that you might call waves of capitulation. Explain that every secular bear cycle experiences at least three such waves, and that our current cycle has seen only two so far.
Make sure they’re aware that any one of a dozen shaky situations in the world right now — the Eurozone crisis, our own federal budget mess, etc. — could be the catalyst for this third major market plunge.
5. Operation Twist and QE3 – Call attention to current headlines about the artificial economic fixes still being implemented by the Fed right now, and explain their relationship to this supposed recovery we’re in. Explain that Operation Twist is really just another quantitative easing package and an attempt to keep long-term interest rates low in hopes that people and corporations will take advantage of cheap credit and start borrowing again.
Tell them this won’t work because Americans have learned their lesson about buying things they can’t afford just because interest rates are low, and that these efforts by the government to stimulate the economy artificially are really just “caffeine fixes” that will burn out and fail in the long run.
6. The real unemployment rate – Here’s another current news item that should make an impression. Point out that despite all the talk of recovery, the employment picture in the U.S. remains grim. Though the unemployment rate is supposedly at its lowest in three years, at 8.3 percent, many have pointed out the figure is misleading.
Because so many American workers exhausted their unemployment benefits and fell out of the workforce in the last three years, they are no longer even counted in the process of calculating that figure. If they were, the unemployment rate would be closer to 16 percent or 17 percent than to 8 percent.
7. Freeing the brainwashed prospect – For those clients waiting for the Dow to get back to 14,000 and the S&P to 1,500, this is a good approach. The fact is that the market will get there, but no one can tell how long it will take. Many prospects have been brainwashed by their advisors, and are convinced that if they liquidate now, they will lock in their losses. That seems to make sense on the face of it, but the reality is that people sometimes don't realize they could sell now, but still buy back in at some point in the future — quite possibly even at a lower point. This approach shows them that they can get out now, and get back in at a more opportune time.
8. Talk about the casino analogy– This is a good analogy that illustrates the risk/reward trade-off in today’s market. Make sure your prospect understands that if the S&P 500 were to get back to its previous high of a little over 1,500 from 2007, that means it would have increased by 17 percent from where it stands now.
If, however, it were to match its previous low from this secular bear cycle, it would have dropped by 50 percent. Now urge them to think about that in terms of a casino; in other words, if there were a table on a casino floor that paid out $17 if you won but cost you $50 if you lost, would you be playing it?
9. Winners are optimists – This is a great time to stress to a potential client that the reason he did so well in life is because he is an optimist. Explain that pessimists aren’t generally that successful in business or in life. And the fact is, optimists like to grab hold of any shred of evidence that reinforces their optimism.
So, optimists are hard-wired to fall victim to these compression rallies, and that’s exactly what’s happening to them. You many need to be more convincing when faced by a “good” market, but you still have history on your side.
Use the lessons of history to explain how optimism can sometimes be a double-edged sword, and work against you when you let it obscure the lessons of stock market history.
10. Global volatility and market volatility go hand in hand – You should point out that the world today, including the global economy, is so tightly interconnected that the market can be knocked for a loop by any number of global crises — and there are plenty of those brewing right now.
Use examples like the Eurozone crisis, rumblings of pending recessions in Asia’s biggest economies, the Iran situation’s impact on oil prices, etc. The point is, with the entire global economy so tightly interwoven these days, even a slight sudden downturn in anyone of these situations could very well be the tipping point that leads to the next big crashing wave in the stock market.