For a financial adviser, there are few conversations tougher than telling a client that his portfolio has gone down in value. There are the obvious empathetic pangs that come from loss — after all, a major perk of my business is the joy I derive from playing a leading role in the realization of my clients’ financial goals.
Graduations, weddings, grandchildren are milestone momentsthat I like to think are made sweeter by the returns delivered through my efforts. But, oh, that double-edged sword feels like it cuts deeper on the downside. Inescapably, if I take pride of ownership for providing for life’s joyful moments, I also own a share of the challenges presented by a steep loss in a client’s portfolio value. There’s no denying it hurts.
From a practical standpoint, too, it can be an awkward conversation to tell your clients that, despite the fact the portfolio is down, it’s billing time. Given the market volatility of the last five years, we’ve all had those conversations — and they never get easier. (More: How to Drop Your Adviser)
Both the empathetic and the practical considerations of the inevitable short-term loss demand a hard and fast strategy for preparing investors for loss— before they ever become clients.
So, you want us to grow your money for you? Here’s a quick question: “How much can you stomach to lose? If we put you in that 60/40 index portfolio, would you stay in if it dropped 30 percent in 12 months? Because in the 50-year data, it did.”
Not your typical sales strategy, is it? But it’s the best one for preparing our clients for the fact that the expectation of wealth travels in lockstep with the expectation of short-term loss due to market volatility — think of that double helix we all recall from ninth-grade biology; the strands are inextricable. (More: Picking Your Adviser)
The good news about asking our prospects about their ability and willingness to endure such a ghastly short-term loss is we can also tell them that the same 50 years of data show that 60/40 index portfolio delivered a 12-month gain of more than 41 percent.
Both the high and low are anomalous events, and we would expect that portfolio to deliver an annual return of 9.55 percent with a level of uncertainty as measured by standard deviation of about 9.49 percent. That’s the story we tell our potential clients.