A top Nationwide
executive has ideas about how to help clients avoid headline-driven investment
decisions.
By John Carter | March 06, 2020 at 01:52 PM
Countries around the world are assessing the
human impact of the current coronavirus outbreak, as total deaths have now
eclipsed 3,000. The vast majority of infections and deaths have occurred in
mainland China, but other nations, including our own, are responding to the
potential for a wider outbreak with travel restrictions and quarantines of
highly impacted areas.
Any major news event involving China will
likely cause ripple effects around the world, due to the important role the
country plays in the global economy. And now that coronavirus has hit home it’s
become even more real to American investors.
Given the ongoing uncertainties surrounding
the duration and scope of the outbreak, financial advisors are being called on
— literally, in many cases — to answer client questions that sometimes don’t
have answers. Yet, advisors have a critical role to play in helping their
clients make sound financial and investment decisions. Doing so requires
delivering steady encouragement to clients to remain calm, not react to the
headlines and stay focused on the long-term.
That is no small task for today’s advisors.
Thanks to 24-hour financial news channels, the Internet and mobile devices,
there is now a never-ending abundance of news and information with the
potential to impact the markets and your clients’ behavior. While you might
expect that this river of information would inform better investment decisions,
research has shown that it’s often the opposite. During times of heightened
uncertainty, emotions can take over and negatively affect our investment
decisions. Many advisors may have experienced this in client conversations in
the past week.
The best way to prepare for volatility, low
interest rates that are challenging investors and the uncertainty we are
experiencing now is through portfolio diversification and creating a financial
plan that will meet your clients’ financial goals while accounting for the
market’s inevitable ups and downs.
But I suspect many advisors find themselves
working with people in the midst of this uncertainty who may not have done that
preparation, or even if they have, are still tempted to react to the news of
the day.
For those advisors, here are five simple facts
to encourage clients to keep in mind as a potential antidote to reflexive
shortsightedness.
1. Bad news often
increases investment activity.
Media interest in the financial markets rises
in times of market stress, with good reason. Their business models are driven
by attracting more viewers or subscribers, and for a financial media platform,
nothing attracts individual investors more than bad news. In their defense,
it’s the media’s job to cover events that move the market. But all of that
noise can push your emotional buttons, leading you to make hasty decisions and
buy or sell your investments too quickly.
2. Reacting and
trying to time the market takes a toll.
As individual investors react emotionally to
news headlines, they tend to buy and sell investments frequently and at
inopportune times. All of this movement in and out of the market means they run
the risk of missing many of the best days in the market. And the more good days
they miss, the more potential gains they give up.
3. Staying invested
is a key strategy for success.
To make the most of market opportunities, it’s
best to tune out the daily news and stay invested for your long-term goals.
Although there will be down days for the stock market and negative headlines to
go along with them, the likelihood of market losses drops dramatically over
longer periods.
4. A balanced
portfolio offers significant potential value.
If you avoid the temptation to trade in or out
of the market and stay invested in a balanced portfolio based on your long-term
goals, you’ll be in a better position to reduce the amount of risk you take on
and may potentially increase the returns you realize over time.
5. History is on
your side.
History has favored investors who keep their
cool at times like this. Since the financial crisis, we have seen five declines
of greater than 10%. It took between 33 and 144 days to reach new highs after
these declines. In the six months following the Swine Flu outbreak in 2009,
global markets rallied by 40%, while there was a 23% rally in the six months
after the SARS outbreak in 2003.
Investors should maintain their discipline and
avoid overreacting to news headlines. As we approach the election, the
emotional distractions are bound to increase even more. These facts and caring
encouragement can help your clients tune out the noise and trust the proven
wisdom of focusing on the long-term.
John Carter is the president and chief
operating officer of Nationwide Financial.
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