However, where possible keep the portfolios you have agreed for the longer term if they still meet a client’s risk profile. To allay a client’s nerves, it is worth reiterating how the funds work within the client portfolio and relate to their objectives, as well as going over how they are managed.
You should also explain the bounce-back opportunities. You can use historical bounce backs as examples but do highlight that history is only an indication and that you can not guarantee there will be a bounce back or foresee when it might happen, if it does.
Whatever you do, do not be tempted to try and call the bottom. It is very difficult to do and you are more likely than not to get it wrong.
Do not have unrealistic expectations and be open with clients
Explain to clients that they should not expect too much from investments in the short term – that is, the next couple of years. And make sure they are clear that some investments will fall further before recovering.
Cash flow modelling is useful if you want to use a visual aid to show the impact of a bear market followed by a bounce back on the longer-term value of investments and portfolios.
You will also want to look at the level of diversification within all your clients’ portfolios as well as their overall and other savings and holdings.
The steeper the loss, the bigger the climb to get back to even
So-called market corrections, in which markets fall between 10 per cent to 20 per cent over a short period of time, are relatively routine and occur every couple of years. What investors need to be wary of is a bear market that is associated with a recession or a crisis, which can see markets fall 30 per cent or 40 per cent. When markets fall steeply, the recovery is harder. For example, to break even a loss of:
- 10% requires a gain of 11%
- 20% requires a gain of 25%
- 33% requires a gain of 50%, and
- 50% requires a gain of 100%.
Recovering from big falls therefore demands time and patience. This is, of course, an easier task for those who are young than it is for those who have retired and who are using their investments to supplement their lifestyle.
Clients who rely on investments
Some clients will rely on the income they get from investments in retirement or, if they are not yet retired, to supplement their income.
They need to be more vigilant than most in case there is suddenly a need to adjust or even halt withdrawals and lean on other savings for a time.
This is to avoid 'pound cost ravaging' – also known as ‘negative pound cost averaging’ – which can do severe damage to pension or retirement investments. Opting for flexible drawdown gives retirees more flexibility and the opportunity to keep growing their fund if they invest wisely. But if they are relying on the income from the drawdown, it can have a severe impact if market values and investment returns fall in the early years of retirement.
