The Money is Never Easy


"The easy money has been made".

Anytime the market experiences a sustained period of growth, industry pundits use the phrase, “The easy money has been made” to caution advisors and investors of a market that may be losing steam.

While I love the overall message – that it’s important to think about how to prepare clients for market volatility, and that betting on the longevity of a bull run can be risky – we are clearly missing an important point.

The money is never easy.

Looking back, it is easy to say that the gains achieved in client portfolios were easy – but in reality, there are always challenges. For example, the easiest money would have been made by anyone invested in April of 2009, but we know convincing investors to buy after a 50% drop in the S&P is anything but easy. And even in prolonged bull runs, the market is apt to experience short-term market volatility, which can greatly impact vulnerable clients – ones in or near retirement, or even ones that are highly risk averse.

There are multiple examples of challenging market conditions in our current bull market. In mid-2010 and 2011, the S&P 500 experienced two dips of 16% and 17%, respectively. We saw a rocky transition from 2015 into 2016, delivering an 11% drop. Finally, we kicked off the 2018 new year with a 10% drop.

How did your risk-sensitive clients react to those market dips?

The mark of a good advisor is one that prepares clients, at least in part, for any market scenario. The level of protection you instill into each portfolio will obviously be tailored to each individual client, but that’s an essential advisor value – providing a smooth investment experience that aligns with each client’s expectation.

The problem is in the long-run, a 10% or 17% drop isn’t that notable, particularly as the market continues to push to all-time highs. That, paired with the necessary long-term mentality carried by financial professionals and short-term memory of investors makes it difficult to manage these short periods of volatility. That can raise problems with segments of your client base.

Advisors can reduce the headache associated with these market hiccups by remembering that the money is seldom easy, and even the strongest bull runs will miss a step or two.

Instead of building portfolios to fit the current market cycle, wouldn’t it be easier to build them to perform in a way that makes sense to the client regardless of market conditions?

Advisors can prepare clients for short-term market dips with four simple, repeatable steps.

1) Ask three questions you already know the answer to.

Q1 - Would you expect a portion of your portfolio to be exposed to global market, and the volatility and returns associated with those markets?

Q2 - Would you expect a portion of your portfolio to be actively managed during periods of market volatility? 

Q3 - Would you expect a portion of your portfolio to be excluded from market movement during periods of decline? 

More often than not, they are going to answer yes to all three questions. Who doesn’t want to capture growth, reduce volatility, and protect from market decline? While the answers are fairly obvious, these questions open the door for a conversation about volatility and diversification.

2) Discuss the trade-offs of the levels of diversification required to meet their expectations.

It’s important to prepare clients for potential portfolio outcomes before they happen. That seems to be most important for investors with long time horizons and more aggressive risk profiles. Helping them realize that in order to give them some level of protection from a market turn, they are not going to match the S&P 500 is key. If they indicated that they want some protection from market decline, they’ll be ok with not beating the S&P. Even so, it’s important to set that expectation early – preferably when you build your initial investment proposal.

If you don’t set explicit and clear expectations for portfolio performance, you can find yourself in the difficult situation of retroactively justifying the quality of your advice. With proper education, a client should understand that an advisor can’t guarantee an investment outcome – the market is unpredictable. That doesn’t mean that you can’t help them understand what their allocations are designed to do in certain scenarios, which goes a long way when the market moves unexpectedly.

3) Build a portfolio to match the client's expectations.

Pair your client’s investment preferences (their answers to the three questions in step one in conjunction with their risk profile) with assets that are designed to give them the level of protection and growth that they will expect. You probably have your own investment philosophy, so I won’t go into the details of how exactly to blend assets to match a client’s expectation profile. The key here is to remain objective, and regardless of current market cycle, build the client’s portfolio to match their overall profile.

4) Document, report, and validate to reduce subjective decision-making.

One of the most important aspects of preparing clients for any market scenario is the readiness to proactively and clearly address client issues – the most common of which are a bi-product of market volatility and misaligned expectations.

By documenting your discussion (mentioned above) and revisiting it in your reporting, you can validate portfolio performance – not as a way to indicate future returns, but rather, to show how a portfolio performed as designed. Open each client meeting with a review of their investment profile (not only risk, but also attitude and expectations), and demonstrate how your decisions are in-line with those preferences. Doing so can assuage client anxiety and build trust in your guidance.

The past decade in our market has created a lot of wealth. However, I don’t think any advisors would say that it has been easy. The market and clients are similar – full of surprises, challenges, and constantly changing. Maybe the question we should be asking isn’t if the bull market is slowing down, but rather are our clients equally as prepared for a downturn as they are another 10 years of growth.