Investment Management

Helping Clients Maintain Long-Term Focus

You know the drill: emotion costs money, and discipline makes money. But how do you keep your clients on board through market downturns? Here are some talking points.

Why Invest for the Long Term?

  • A long-term investment plan is not based on relative performance, but on achieving a return that meets a client's goals, based on long-term historical return projections of various investments
  • If the focus of the plan changes to maximizing returns or avoiding risk, meeting the primary investment goals becomes less likely
  • A long-term, "buy-and-hold" strategy is also designed to reduce the risks, transaction costs, and tax losses or liabilities involved in frequent buying and selling of mutual funds
  • Long-term plans are continuously monitored during the investment period, but if the investments are chosen wisely in the first place, selling typically only occurs when an investor's goals have changed, or to rebalance a portfolio because of internal changes in the portfolio

Key Drawbacks of Short-Term Thinking:

  • Inexperienced investors tend to over- or underestimate their risk tolerance
  • Research has shown that people feel the pain of a loss 2 to 2.5 times as strongly as they feel the pleasure from gain
  • Clients need a reason to stay away from market-timing traps
  • Active traders need to be right about when to buy and when to sell about 75% of the time to simply equal the returns produced by a well-designed buy-and-hold strategy

Some Practice Tips:

  • Explain the portfolio structure in terms of meeting goals ("this extra risk is designed to create potential opportunity to buy that second home") and fundamentals ("this investment was chosen because it may do well when the other investments that are now performing well lag")
  • Give your client something to do instead of focusing on the daily ups and downs of the market, such as taking a personal inventory to see if their goals have changed
  • Transition your client to a "life cycle" approach, where they measure investment success by meeting their personal goals, not chasing performance
  • Stay in touch with your client's risk tolerance as the market moves, making modifications if needed
  • Educate your client on market history and realistic return expectations
  • Build a diversified portfolio to minimize overall return volatility
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